Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Apr 24, 2020

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Here's what you need to know...

Auto insurance is one of the few forms of financial protection that you’re required to pay for when you own a car. While state officials typically require vehicle owners to insure their personal vehicles, the marketplace is a competitive one.

That’s why companies take the time to develop their rates that will attract a target market.

Since the marketplace is so competitive, some consumers will shop around for coverage while they already have a valid policy in place to save money.

While shopping the market is the only way to find the best price, canceling your existing insurance could cost you if your insurance company charges a cancellation fee.

Here’s what you need to know about penalties for canceling your insurance midterm.

Start comparing car insurance rates now by using our FREE tool above!

Competition Keeps Premiums Down

According to the latest statistics, the average person pays around $841 per year for coverage. Surprisingly enough, unlike inflation, this number is falling rather than climbing.

The main reason the number is dropping is that carriers must keep their rates competitive to attract new business.

Without a competitive marketplace driving premiums down, the rates would be exorbitant by now.

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Consumers Have the Right to Choose

State officials dictate whether or not insurance is mandatory. In most states, there are compulsory auto insurance laws saying that all private passenger vehicles must have a specific amount of liability coverage.

In the other states, you must either buy insurance or prove that you’re in a financial position to pay for claims to comply with the law.

Even though the state is in charge of setting the law, that doesn’t mean that the state can say who you must buy insurance from.

You’re free to choose any carrier doing business in the state as long as that carrier is licensed to do business in the state. If one carrier isn’t giving you a great deal, you’re free to move on to another.

Can you cancel an existing policy at any time?

There may come a time where you rush your decision to buy insurance. Whether you’re buying a car or you’re in the midst of a move, it’s best to buy overpriced coverage than it is to drive around uninsured.

When you’re ready to shop around, you can do your research on pricing and make the switch.

Auto insurance might be sold in terms, but you around required to keep your policy for six months or twelve months just because that’s the policy you bought.

The only thing a policy term does is dictate how long the insurer must offer you the rates that you were offered when the policy was incepted or renewed. You’re free to cancel your coverage at any time during that period.

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Can the insurance company penalize you for switching carriers?

Every state has its laws regarding whether or not a company can charge a fee to their policyholders who terminate their contracts early.

The fees that are charged for early terminations are necessarily called penalties.

Instead, they are fees that help the insurer cover administrative costs associated with processing paperwork. If a carrier is permitted by the state to charge a fee, they may decide to only assess the penalty for certain cancellation reasons.

If you’re surrendering your license or you’ve sold your only vehicle, there’s a good chance the fee will be waived.

However, if you disclose that you’re switching carriers, it’s likely that the fee will be charged.

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How much is the cancellation fee?

Fees vary by state and carrier. If you’re interested in finding out how much you’ll have to pay to make the switch, you should review your contract.

The information on termination fees must be written into the Personal Auto Policy agreement.

This fee is typically called a short-rate cancellation charge in the insurance industry.

The short-rate cancellation penalty will either be a percentage of your unearned premiums or a fixed fee. The percentage may only be charged if you have a balance of $200 or more on the policy due.

These fees are charged to help the company recoup some of the premiums they projected that they would collect. Fixed fees cover the cost to process requests.

What is it called if no penalty is charged?

If you’re not charged a fee for canceling your policy, you’ll receive a pro-rated refund for all of the premiums that you’ve paid and haven’t used.

Since it’s hard to understand the language used in a Personal Auto Policy, it’s best to skim the contract and look for words like “unearned premiums” and “pro-rated” to find out if you’ll be penalized or not.

Are there other penalties for canceling your insurance?

It is critical to cancel your policy effective the date that your new coverage starts. Even if it is just a few days lapse, that lapse could have a dramatic effect on your driving privilege.

Some of the penalties for having an insurance lapse include:

  • Suspension of driver license
  • Suspension of registration
  • Reinstatement fee
  • Fines and court fees if you’re cited
  • Vehicle impound and jail time

If you’re tired of your high rates, don’t let your term set you back. Start to shop around for coverage by using an online quoting tool and see how much you could save.

After you find the best rates, bind your new policy, and then you can draft a cancellation letter.

You should never pay too much for your auto insurance because you didn’t shop around. Enter your zip code below in our FREE comparison tool!