Are car insurance cancellation fees legal?

You may receive a car insurance cancellation fee if you try to cancel your policy before its renewal date. You may be asking, "Are car insurance cancellation fees legal?" According to car insurance cancellation laws, you should never be charged a cancellation fee for choosing not to renew a policy. To avoid a car insurance cancellation fees, keep track of when your policy is up for renewal.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Sep 8, 2021

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Here's what you need to know...

  • There are certain times that insurance carriers can legally charge you a fee for canceling your policy
  • You should never be charged a fee for choosing not to renew a policy
  • If you have questions regarding your insurance company’s standards for charging fees, contact customer service to ask more specific questions

When you decide that it is time to buy insurance with a new carrier, it is only natural to assume that you will receive a refund when you cancel your existing policy.

Since you do have the right as a policyholder to cancel your insurance at any time, you are entitled to a refund for whatever premiums have gone unused.

While all state departments require carriers to issue refunds after a cancellation request is received, you might be surprised to learn that many companies have adopted a policy where they will charge you a cancellation fee before the check is sent.

If you want to make informed decisions before you comparison shop and before you start making plans on how you will use the money that you are saving, read this guide about cancellation policies and fees.

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When can an insurer legally charge you a fee to terminate coverage?

Finding affordable insurance could very well cost you money when you are currently doing business with a company that charges cancellation fees.

It is important that you know that even companies that have adopted a fee structure cannot charge their policyholders a fee whenever they want to cancel their policy.

If your policy is coming up for renewal in the near future, it could save you money to wait until your renewal before you find a new plan.

The only time that the company has the right to charge you a fee is when you are canceling your policy voluntarily before the policy term’s expiration date.

The company cannot charge a fee if you are choosing not to renew your policy, or if the company has ordered a cancellation or a non-renewal because of your claims record or driving history.

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What are the different types of cancellation policies?

One way that you can decide if canceling your insurance early is wise or not is to find out what your existing insurer’s cancellation policy is.

Companies have adopted one of two types of policies: pro-rated refund structures and short rate refund structures. You should understand how each works before you even commit to buying insurance with the carrier in the first place.

What is a pro-rated refund?

Before you learn that an insurer does have the right to collect a cancellation fee, you probably assumed that you would receive a pro-rated refund.

A pro-rated car insurance refund is a refund for the premiums that you have not used but that you have already paid for.

The refund will be proportionately calculated based on how long the policy has been active and the date that you requested your policy to be canceled.

You will need to check the state laws to see if a company is required to issue a pro-rated refund. Just because a state allows an insurer to charge a fee does not mean that all carriers will.

Many carriers prefer to pro-rate refunds to avoid bad reviews and drops in customer satisfaction.

Some of the companies that are known to pro-rate refunds include State Farm, AAA, Allstate, Geico, and Farmers.

What is a short-rated refund?

A short-rate cancellation is one where the policyholder is charged a fee for canceling early. It is essentially a penalty for failing to keep the coverage for the entire term.

Depending on what state law permits, the insurer will be entitled to keep some of the unearned premiums that would have otherwise been paid to the policyholder in the form of a refund check.

Many companies have some type of short-rate cancellation penalty.

The most common type of penalty is to charge the client 10 percent of the unused premiums, but some companies will actually charge a fixed fee between $30 and $50, as long as the balance owed on the policy exceeds a certain amount.

Of course, it is also possible for the insurance provider to cancel your policy due to lack of payment. Many companies give you a grace period of a few days to a few weeks to pay what is due before they will cancel your policy.

If you know you can’t make your monthly payment, contact your auto insurance carrier right away and tell them, ideally before you receive any kind of cancellation notice. They may be able to set you up with a payment plan so you can keep your auto coverage.

If you’re the type to forget about paying your bills, set up automatic payments so the money is deducted automatically.

If your policy is canceled and you have a lapse in coverage, you will likely end up paying much higher insurance premiums when you sign up for your next auto insurance policy.

If your policy is canceled and you are pulled over by law enforcement and can’t show proof of insurance, you could end up paying hefty fines and potentially even facing license suspension.

If you cancel your policy because you won’t be driving anymore, you may be required to contact the Department of Motor Vehicles and hand over your license plates.

How do insurance companies justify a cancellation fee?

If you are legally allowed to cancel your coverage at any time, it is not out of line to be upset when exercising your rights leads to a fee.

The insurance marketplace is a competitive one. In order to save money, you will need to shop around and switch carriers in many cases.

While policyholders may not like it, there is a reason why state departments have allowed insurers to charge their clients fees.

When an insurance company calculates rates, they are using claims projections and other detailed data to determine how much they need to collect to stay profitable.

As they take on business, they are taking on risk and taking in money. When a policy is in effect, the insurer must service the policy and cover claims that are presented.

Cancellation fees are a way for the insurer to cover the increased administration cost associated with early cancellations that just cannot be predicted.

It is the company’s way to recoup on some of the money that they will not collect.

What do you need to know about buying auto insurance?

There is a right way and a wrong way to replace your auto insurance policy.

If you want to really lower your expenses, here are the steps to take:

  • Ask your insurer what their refund policy is
  • Receive quotes for similar coverage elsewhere
  • Discuss options to lower premiums with your insurer
  • Select a policy and choose the effective date
  • Submit a cancellation for your current insurance

No one wants to pay a fee to cancel insurance that they do not want to keep.

When you are shopping for insurance, make sure to ask the company about the cancellation process and any potential fees hidden in the fine print.

If you find cheaper rates with another insurer, talk to your current insurer and see if they are willing to lower your rates to keep your business.

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