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Is there a cancellation fee for auto insurance?

Things to Remember...
  • A standard Personal Auto Policy is sold in either a 6-month or a 12-month term
  • Auto insurance policyholders are free to cancel their auto insurance policies at any time and for any reason
  • If you pay your premiums in advance and cancel your policy mid-term, you’re eligible to receive a refund for the unearned premiums
  • It’s common for auto insurance companies to subtract a short-rate fee from your refund for the administrative costs associated with a client canceling their policy early
  • Some states don’t allow insurance companies to charge an early cancellation fee. In this states, you’ll receive a pro-rated refund for all of your unearned premiums

You can never really predict how long you’ll need insurance on a vehicle. You may buy insurance with the intentions of keeping your policy for the entire year just to find out that you’re moving out-of-state months later. Since it’s your choice to enter into a contract with an auto insurance carrier, it’s your choice to decide when to end that contract.

All licensed insurance companies must give you the option to end your contract at any time, but that doesn’t mean that early terminations don’t come at a cost. If you cancel your policy before the term expires, there’s a good chance you’ll be charged a cancellation fee.

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Your Right to Cancel Your Policy

AdobeStock_58145823-1600x1600An auto insurance policy is a binding contract between you and an insurance carrier. Under the terms of the contract, you agree to pay your premiums and fulfill certain obligations so that the insurance company will provide you with the coverage that’s listed on your declarations page. If you don’t pay, you don’t have coverage.

The terms and conditions written into your contract lay out your duties as an insured. They also explain your rights as a policyholder. One of the rights that you have as a party in the contract is that you can cancel your policy at any time. The insurer isn’t given that same right because it could put a consumer in a dangerous place without protection.

When can your insurance company cancel your policy?

If an insurance company had permission to cancel your policy for any reason, it’d be common for carriers to cancel coverage immediately after a claim or a moving violation. Fortunately for you as a consumer, you have rights that protect you from losing coverage at any time during your term.

The only time a company can cancel a policy without notice is when the policy is still in the underwriting phase. The company has between thirty and sixty days to underwrite your application and to decide if they want to take on the risk. If they discover something on your record, they can change their mind during this time.

If you lied on the documents or you’ve been convicted of fraud, your policy will be rescinded.

Policyholders who are guilty of fraud or material misrepresentation aren’t protected from mid-term cancellations. Here are the reasons your policy can be canceled after the sixty-day cooling off period:

  • You don’t pay your insurance premiums on time
  • Material misrepresentation
  • Material change in risk assumed that increases the possibility of hazard
  • Substantial breach of duties written in the contract

What is an insurance term?

An insurance term is the period on your declarations page or insurance ID cards where your coverage is effective. As long as you pay your premiums and don’t change the risk present on the policy, your premiums will remain the same. When a policy cancels effective the expiration it’s called a flat cancellation.

Reasons a Policyholder Will Cancel Their Policy Early

You don’t always have control over the situations that present themselves in life. Some of these situations might eliminate the need for auto coverage.

There are more reasons why you might cancel your policy before your term is up for expiration. Here are some of the most common reasons:

  • You sell your vehicle and don’t plan on buying a new one
  • Your car is totaled, and you don’t plan on replacing it
  • Your car breaks down, and you don’t need a replacement
  • You lose your license or plan on surrendering it voluntarily
  • You transfer ownership to a family member and don’t need insurance in your name
  • You move out-of-state and need insurance from a new provider
  • You want to buy insurance from a new carrier to save money
  • You combine insurance with a new spouse

Do all insurance companies charge a fee?

Worried-couple_homepage_imageIt’s obviously in the insurance companies interest for you to keep your policy for the entire term. If you cancel your policy mid-term, the company can’t project how much they’ll make by the end of the year after premiums, claims expenses, and administration costs. For this reason, some states allow carriers to charge an early termination fee.

While cancellation fees are allowed in some states, not all companies charge them, which is why you need to ask your agent directly before you buy insurance if you plan on switching carriers early. As long as you’re equipped with the knowledge early on, you can plan ahead before you purchase a policy.

What is the difference between a short-rate cancellation and a pro-rate cancellation?

When you cancel your policy, you’re entitled to receive your unearned premiums after the cancellation is processed. The company will either process a short-rate cancellation or a pro-rate cancellation. The final refund will be mailed to your seven to fourteen days after the carrier receives your cancellation request.

A prorate cancellation is one where you receive all of the premiums you’ve paid in advance.

No fee is subtracted from the refund. A short-rate cancellation is one where a fee is deducted from your refund. This fee depends on your state and the carrier. Some short-rate fees are fixed, and others are a percentage of the unused premiums.

If you’re not happy with your current premiums, you can shop around and look for a more affordable policy. Check with your current carrier before you start shopping to see if you’ll be charged a fee.

If it still makes sense to switch carriers after the fee is charged, use an online rate comparison tool and see where you can save money.

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