Whether you're unhappy with your rate or with some other aspect of your car insurance policy, changing to a new company is always an option. But before you make the switch, make sure you know exactly how much it might cost.
Insurance companies sometimes charge penalties for early cancellation. Plus, you may want to consider any fees or down payments required by your new insurance company. Consider weighing all costs before you cancel early.
Don't let your policy lapse without payment
While it might sound easier to simply stop paying your premium, it can hurt you in the long run. The insurance company can cancel your policy, and future companies may also identify you as a high-risk driver. As a result, your new provider may charge you a much higher premium to account for their risk. It's a better idea to properly cancel your current policy and pay any necessary fees.
Cancellation penalties: short-rating and pro-rating
From the insurance company's perspective, early cancellation involves administrative costs as well as the loss of the monthly premium. Insurance companies set their premiums based on the full term of coverage, which is usually a year. Each insurance company has unique rules and fees regarding cancellations, so be sure to read your insurance policy or ask your broker for the exact information.
There are two basic methods auto insurance companies use to process refunds on a cancelled policy: short-rating and pro-rating. A pro-rated cancellation gives you back the full amount of the unused premium, while a short-rated cancellation takes a certain amount out of the refund as a penalty for early cancellation. According to the Financial Services Regulatory Authority, auto insurance companies can use short-rating to account for any administrative fees associated with cancelling an insurance policy.
For companies using a pro-rated system, if you have a 12-month policy and cancel after three months, you can get back nine months' worth of your premium. If the company is short-rating the cancellation, you can lose some of that remaining premium. While exact short-rating fees depend on the policy, you'll usually pay more fees the earlier you decide to cancel your policy.
Before you cancel, ask the company which method they use and find out how much money you stand to lose in a short-rating situation. You’ll need this information to determine whether the savings on your new policy makes up for that difference.
Starting a new policy: fees and down payments
Insurance companies may require a down payment when you open a new policy. Therefore, in addition to any money you might lose on the cancellation of your old policy, you'll have to pay these costs up front. Make sure to do your research so any fees or down payments don't come as a surprise.
Make sure to prevent gaps in coverage
When changing car insurance providers, make sure you don't end up with a gap in coverage after you cancel your old policy before your new policy begins. Driving without insurance in Ontario (or any province, for that matter) is illegal and can result in severe penalties. A period where you're uninsured can also lead to other insurance providers raising your premium down the road.
When to shop for car insurance
Shopping around for car insurance when your policy renewal date is approaching is usually the best time and will help you avoid cancellation penalties. Cancelling on renewal gives you a smooth transition into the new policy.
However, if you're unhappy with your current rate or policy, start shopping around for quotes right away. Comparing rates will tell you if you're overpaying, and by how much.
To find out whether you'll save money, you'll need to calculate how much you will save over the policy term on your premium alone. Then, subtract from that the costs of early cancellation. If you still come out ahead, then cancelling right away is the right choice.
When shopping around for car insurance, there's no obligation to buy, and looking at quotes won’t cost you anything. It’s a good way to stay informed about what other companies are charging and make sure you aren’t paying more than you should be.
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