Whether you're unhappy with your rates or with some other aspect of your car insurance, 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 you.
Insurance companies sometimes charge penalties for early cancellation. Plus, you'll have to consider any fees or down payments required by your new insurance company. Consider all of the costs before you cancel early.
Don't Let Your Policy Lapse Without Payment
While it might sound easier to simply stop paying your premiums, it can hurt you in the long run. While the insurance company will end up cancelling your policy, future companies may also identify you as a high-risk driver. As a result, your new provider may charge you much higher premiums 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 premiums. Insurance companies rate 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 for the exact information.
There are two basic methods auto insurance companies use 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 Commission of Ontario, 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 will get back nine months' worth of premiums. If the company is short-rating the cancellation, you will lose some of that remaining premium. While exact short-rating fees depend on the policy, you'll usually pay more fees the earlier in your policy you decide to cancel.
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. Therefore, in addition to any money you might lose on the cancellation of the 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.
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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 and before your new policy begins. A period where you're uninsured can lead to other insurance providers raising your premiums down the road.
When to Shop for Car Insurance
Shopping around for your car insurance when your renewal 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 whether you'll save money, you'll need to calculate how much you will save over the policy term on premiums 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, so taking a look at quotes won’t cost you anything. It’s a good way to keep tabs on what other companies are charging and make sure you aren’t paying more than you should be.