What happens if you cancel your car insurance?

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Joel Ohman
Founder, CFP®https://res.cloudinary.com/quotellc/image/upload/insurance-site-images/ciccom-live/41b5e36b-joel-ohman.jpg

UPDATED: Oct 23, 2017

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Here's what you need to know...
  • You are legally required to carry continuous insurance in states with mandatory insurance laws when your vehicle is registered to be operated
  • When an auto insurance policy cancels, the Department of Motor Vehicles is notified immediately through an electronic verification system
  • Failing to carry insurance on a vehicle you own can result in serious penalties and other consequences
  • Depending on the reason for cancellation, you may have to pay a short-rate fee for terminating your insurance contract early

It’s important that you know what happens when you cancel your auto insurance before you pick up the phone to process your request.

If you’re about to sell a vehicle, move to a new state, or switch coverage from one carrier to the next, you’ll have to eventually contact your insurer by phone or in writing to notify them that you won’t need coverage for much longer.

It’s important that you know what happens when you cancel your auto insurance before you pick up the phone to process your request.

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All Car Owners Must Comply with Auto Insurance Requirements in the State

A binder labeled "requirements".

In most states, auto insurance is a requirement. In order to own a vehicle that is registered in a state with mandatory insurance laws or other types of financial responsibility laws, you’ll need to have continuously active car insurance.

If you’re not carrying auto insurance in the state that you live in and your car is registered in your name, you’re breaking the law and you could be convicted of a misdemeanor.

These laws are put in place to not only protect other drivers, property owners, and pedestrians but also to protect your finances so that you’re able to pay for the damages you’re liable for.

How is auto insurance coverage verified through the state?

Insurance departments have come up with new ways to verify coverage as quickly as possible.

Instead of relying on law enforcement to pull over every uninsured driver, many state officials now require departments to use electronic means to verify every driver have active coverage.

These electronic verification systems use a vehicle’s VIN and the information that’s reported by auto insurance carriers to try and tackle the uninsured motorist problem.

What happens if you cancel your coverage too early?


Since auto insurance can easily be canceled at the policyholder’s request, canceling your policy before you transfer ownership or before you activate a new plan can result in major issues.

This is the prime reason why it’s crucial that you know your responsibilities and the law before you go through with your cancellation request.

If you receive a letter from your Department of Motor Vehicles, you’ll be given a period of just 10-14 days to respond with proof that you still have insurance.

Here are some of the consequences and penalties that you might face:

  • Suspension of your registration
  • Suspension of your driver license
  • Reinstatement fees
  • Citations for driving uninsured or with suspended plates/license
  • Requirement to file an SR-22
  • Misdemeanor conviction if caught driving uninsured with fines
  • Increased rates through next carrier for lapses in auto coverage
  • Uncovered liability and physical damage losses

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When to Consider Canceling Your Car Insurance

There are a few reasons that vehicle owners might want to consider canceling their coverage.

In some events, you won’t even need to worry about buying coverage again, but in others the dates and coverage matter.

It’s very important that you know how different scenarios require different approaches to cancellations.

Here are some examples that you should be fully aware of:

– You’re Moving Out of State

Moving from one state to another creates some complications with car insurance. Some assume that they can change their address and they’re all set.

In actuality, each policy is written by insurers licensed in the state. Even if one company name matches, it’s a different company with a different NAIC number from state to state.

You’ll need to either start a new policy with your current carrier or open a new policy entirely with a new company.

Don’t actually cancel insurance from your old state until you have transferred your registration to your new state of residence or your old state may attempt to fine you.

You’re Selling the Only Car You Own

If you post your only car for sale, you don’t really have a need for coverage. Even with this said, you can’t really cancel coverage until an agreement has been made and the bill of sale is signed.

At that time, liability transfers to the buyer and you’re not the one who’s responsible for insuring the car in question.

You’re Not Driving the Vehicle

It’s tempting to jump at an opportunity to cancel coverage if you’re not driving, but that’s not a wise move all of the time. If the car’s still in your possession and it’s registered to be driven, you need minimum liability limits to comply with the law.

However, you’ve decided to turn in your plates and register your car as non-operable, you can keep it in storage and cancel coverage.

If you still want damage coverage on the car, you can keep your insurance active and only carry comprehensive.

You’re Switching Auto Insurance Carriers

Switching can be the best way to save money when you believe you’re paying too much for coverage.

If you’ve found a new policy with much lower rates, don’t just cancel your policy.

Wait until the new policy is in place and then send in your request. Many experts even recommend waiting until the policy has fully been underwritten and issued so that you don’t see a sudden rise in your premiums.

Fees for Canceling Auto Insurance Early


If you’ve decided that it’s time to cancel coverage, you’ll need to read through the policy to see if you’re going to be charged a fee.

As a policyholder, you have the right cancel coverage at any time, but some states have also given insurers the right to charge for early terminations.

In the industry, the charge is called a short-rate fee and it’s either a fixed amount or a percentage of the unearned premiums.

What happens if no fee is charged?

If no fee is charged, then it’s referred to as a pro-rated cancellation and the entire amount of the premiums that you haven’t used will be returned to you.

You’ll need to advise the company where to send your refund check in your written request.

If you need insurance in a new state or you just want more affordable premiums, it’s time to shop around before jumping the gun to process a cancellation.

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