Do you get your deposit back from car insurance?

Do you get your deposit back from car insurance? If you cancel your coverage a few weeks later you're entitled to a refund. If you keep your policy for the entire term your deposit goes towards the balance of your policy.

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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 15, 2020

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Here's what you should know...

  • When you sign up for auto insurance, the carrier may require you to pay for the first and last month. This payment is often referred to as a deposit
  • Do you get a refund if your insurance is canceled? If you pay your deposit and you decide that you’d like to cancel your coverage weeks later, you are entitled to receive a refund of your unearned premiums
  • Some carriers will take a short-rate fee from your refund. This fee will either be a percentage of the unearned premiums that remain on your policy or a fixed fee
  • If you keep your policy active for the entire term, the deposit that you pay will go towards the balance of your policy. This will bring your monthly payments down or make it so that you don’t have a payment the last month

You have to put a deposit down when you activate many different service contracts. From electricity accounts and apartment leases to services through cable and Internet providers, most companies require a deposit.

The purpose of the deposit is to protect the service provider from losing money before you start to make your monthly payments.

While it’s not standard across the marketplace, some personal auto insurance providers require their applicants to pay a deposit before the coverage becomes effective.

Deposits that are paid at the inception of an auto insurance term work differently than other types of deposits.

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What is a deposit when you’re buying auto insurance?

Deposits for auto insurance policies work differently than deposits for things like cable or electric.

When you pay a deposit to activate or renew your insurance, you’re paying a percentage of your premiums so that the policy takes effect.

The amount of money that you’re required to pay is applied to your premium balance rather than held to pay if you default.

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How much is a deposit for auto insurance?

There is a limit to how much an insurer will charge you to start a policy.

In today’s industry, most companies will only charge you a month’s premium, but some companies still require you to pay a percentage of your premiums at the inception of the policy.

If you’re charged a percentage of your premiums, the remaining balance will be broken up into equal installments.

States mandate how much an insurance company can require. Many states allow a company to charge no more than 30 percent of the entire premium as a deposit.

You should check your state’s Consumer Bill of Rights to see what is allowed if you think a deposit charge is excessive.

Can you cancel your insurance before the next payment is due?

It’s your right as a policyholder to cancel your insurance at any time.

If you’re not happy with the service you’re receiving or you’re actively looking for lower rates, you can switch carriers in the middle of your term.

This is a rule that can be found in the Consumer Bill of Rights drafted in any state. Many companies will ask you to put your request in writing.

Will you get a refund of your remaining deposit?

When you cancel your insurance early, the company is required by law to refund you your unearned premiums.

If you were required to pay a deposit to get insurance, it will go into the paid premiums.

These paid but unearned premiums will be refunded to you on a pro-rated basis unless your policy says otherwise.

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Is there a fee for canceling your insurance early?

State officials often allow licensed insurance companies to charge a fee to cover the administrative costs associated with canceling a policy early.

When this type of fee is charged, it will be fixed and it will range between $25 and $50.

You may be charged a percentage of the unearned premiums to recover lost profits.

How to Draft a Cancellation Letter

It’s important to draft a detailed cancellation letter if you’re trying to end your policy early.

If you have automatic payments set up on through your bank, cancel them at least 5 days before your next payment.

Make sure that you include the following information so that your refund is sent to you in a timely manner.

You need to include the following:

  • Name, phone number, and policy number
  • Date you want the cancellation processed
  • Reason for cancellation
  • Address where refund should be sent
  • Date of request and signature

Are deposits returned if you stay with the carrier?

If you stay with the carrier for the entire term, you won’t get the deposit back.

Instead, it will reduce the balance of your policy premium and the remaining payments will be equally divided up into the frequency of installment that you choose.

If you’re not happy with the deposit you’ve been asked to pay, you should shop around.

You can get instant premium quotes by using an online rate comparison tool. See how much you can save and compare the down payment requirements before you choose a carrier.

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