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Refunds and cancelling your insurance policy

April 14, 2010

If you are considering cancelling your insurance policy, you may be wondering if you are entitled to a refund.  When a policy is cancelled, insurance companies use a variety of methods to determine how much of your premium will be refunded to you.  The method used is dependent on the reason that the policy is being cancelled in the first place.  Outlined below are three of the most common cancellation methods used and the related refund implications.

Pro Rata Cancellation

This method of calculating a refund carries no penalty and the amount is otherwise known as the return premium of a cancelled policy.  This method is typically used if the policy is cancelled at the request of the insurance company.  The return premium (or refund) is calculated by taking the number of days remaining in the policy period, dividing that by the total days of the policy, and then multiplying this number by the annual policy premium.

For example, if you have a 1-year policy with a premium of \$1000 that has been fully paid to the insurance company, and you wish to cancel 200 days into the year, you will have 165 days remaining on your policy.  Your refund, or return premium, would be calculated as 165 days divided by 365 days in a year times \$1000, resulting in a return premium of \$452.05

Short Rate

This method of calculating the return premium or refund carries a penalty, and is often used when the policy is cancelled at your request.  The penalty charged to you is approximately 10% of the return premium, as described in the Pro Rata method above.

Using the example above and assuming the penalty is exactly 10%, the amount that would be owed to you is \$452.05 less the penalty.  The penalty of 10% is applied to the return premium and this amount would be substracted from your refund. Therefore, the amount you could receive will be \$452.04 less \$45.21 equalling to \$406.83

Cancellation Calculations for Recreational Vehicles

The cancellation methods used for snowmobile and motorcycle insurance differ to the ones used for car insurance.

Motorcycles and snowmobiles are known as seasonal use vehicles and have their premiums seasonally adjusted.  The insurance companies charge the largest percentage of your premium in the months that the vehicle has the greatest exposure.  For example, premiums are typically higher for motorcycles in the months of April through October.  As such, if you cancel your motorcycle policy for the winter, you will not be entitled to a premium refund.  Similarly, if you cancel your snowmobile policy in the summer, you will again not be entitled to a premium refund.

Be sure to discuss your options with your insurance professional if you are thinking about cancelling your policy.  They will be able to give you a better idea of whether or not you will receive a refund and, if so, how much you should expect.