Do you have to pay to cancel your car insurance?

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Here's what you need to know...
  • If you operate a vehicle, you must have car insurance coverage
  • Not every reason is a good reason to cancel or switch your insurance mid-term
  • You have a new high-risk driver in the home that will make you ineligible for coverage

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You are legally obligated to carry your insurance when you own a private passenger vehicle, but the state cannot say what licensed insurer you must do business with.

If you find that another carrier will offer you more competitive rates or you have a new driver in your home that might not qualify for coverage, switching insurers might be the only realistic option.

You may also need to cancel early in other scenarios that have nothing to do with underwriting or pricing.

If you have recently received your renewal documentation or something has come up that creates the need for revised insurance, you need to really contemplate if it is time to switch insurers for a better deal or a more comprehensive policy.

Before you decide that canceling is the right option, you should compare quotes and learn about your current carries cancellation policy.

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Do you really need to cancel your policy early?

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Not every reason is a good reason to cancel or switch your insurance mid-term. Before you even start to prepare your cancellation request, you should determine whether or not your reasons are acceptable.

After all, when companies charge you a huge fee to try and prevent you from canceling, switching insurers in an effort to save money could actually cost you money in the long run.

Here are some of the best reasons that you should cancel your insurance before the end of term even when fees are charged:

  • You are getting divorced and must separate your policies
  • You are getting married and are combining insurance for multi-car discounts
  • You have a new high-risk driver in the home that will make you ineligible for coverage
  • You have surrendered your driving privilege and will not own a vehicle
  • You have sold your vehicle and have no intentions of owning one in the near future
  • You have moved out of state or out of the country
  • You buy a new luxury or turbocharged vehicle that the insurer will not insure

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What if you want to cancel because of service or price?

If you would like to cancel your policy mid-term because the premiums are high or because you received poor service from your agent, you really need to weigh the pros and cons.

Some policyholders are willing to take the hit with the cancellation fee just to go with a new carrier that is dedicated to providing quality service.

Other policyholders want to save money and are purely goal-oriented in every decision that they make.

If price is your primary motivating factor in making the move, you will need to compare the cost savings and the charge for early termination to make your final decision.

Even when you pay a higher premium with a carrier, in some cases it will still be more cost effective to wait until your renewal to avoid the fee and make the switch.

How much will you pay for a mid-term cancellation?

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If you are wondering how much you will pay for choosing to cancel your coverage, there is not one specific answer.

The cancellation policies and fees vary from insurer to insurer and also from state to state.

All insurers must comply with the laws that are handed down by the Department of Insurance, but they are not required to charge a fee if they are in a state where they are allowed.

What types of refunds are there?

All insurers either offer a prorated refund or a short-rated refund. How the refund is calculated will show you if your company is charging you more for canceling.

If you do not know what each type of refund is, here is a brief explanation:

Pro-rate Cancellation

pro-rate cancellation, which is referred to as a prorated refund, is the process of canceling a policy and returning all of the unearned premiums to the named insured.

The refund is calculated proportionately based on how long your paid premiums will carry you through and when you are canceling.

If you receive a prorated refund, this essentially means that the carrier did not charge you any type of fee or penalize you in any type of way.

Short-rate Cancellation

A short-rate cancellation is when the insurer will calculate the unearned premiums and then they will assess a fee or penalty. The amount and way that the fee is charged will depend on the company and the laws in the state.

Some companies might charge you a percentage of the premiums that you have not yet used or paid.

Other companies may review how much time is left on the policy and then charge you a fixed fee based on the remainder of time that is left.

This is the process that you must look out for when you are contemplating cancellation or when you are switching to another carrier and trying to avoid the situation in the future.

How can you tell if fees are assessed?

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Doing your homework in advance can really make a difference. If you want to make conscious decisions about your insurance, you should review each company's cancellation policy as you shop.

If you are already with a carrier, you should get your policy booklet out and review the terms of the coverage immediately.

In this booklet, it will detail whether you will receive all of your unearned premiums or just a portion of these premiums after a charge.

It might sound odd to say that you have to pay your insurer just to cancel your coverage, but this could very well happen in some scenarios.

There might be insurers that will waive fees when you have no need for insurance, but you will need to prove your situation when this happens.

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