Switching Auto Insurance: Penalties Or Savings?

While switching auto insurance providers is not considered a bad thing, there are some factors to consider before making the change. Firstly, it is important to understand the terms of your current policy, including any cancellation fees that may be incurred if you switch before the end of the policy term. Some companies charge a flat fee, while others use a short-rate cancellation penalty, which is a percentage of your unused premium. Additionally, it is crucial to ensure continuous coverage by setting the start date of your new policy to be the same day your old policy ends. This will help you avoid higher rates and legal penalties for driving without insurance. Shopping around for auto insurance is recommended at least once a year to ensure you are getting the best deal.

Cancellation fees

There are two primary types of cancellation fees: flat fees and short fees. A flat fee is a set amount you pay regardless of when you cancel your car insurance. A short fee, on the other hand, is calculated based on how much of your policy remains when you cancel. Short fees are a percentage of the remaining premium on your policy. For example, a 15% short fee applied to a cancellation of a 12-month policy nine months after initiation would be 15% of the remaining 3-month premium.

You can usually avoid cancellation fees by waiting until your policy is about to expire or has expired. If you decide not to renew your policy, your insurance company cannot charge you a cancellation fee. However, choosing not to renew is different from cancelling your policy early. Renewal means extending your policy for another term after your current term expires, whereas cancellation means ending your policy before it expires.

If you are thinking of switching auto insurance policies, be sure to check with your current insurer to see if there are any penalties for cancelling mid-policy. You may save money by waiting until the end of your policy term to switch. Additionally, some insurers will waive the cancellation fee if you are surrendering your license or have sold your only vehicle.

Short-rated and pro-rated cancellations

When it comes to auto insurance, cancellation policies are necessary for insurance companies' terms and conditions. The two standard options are short-rate and pro-rata cancellations.

Pro-Rata Cancellation

Pro-rata cancellations are applied when the insurer cancels the policy and, in some cases, when the insured initiates the cancellation. Insurers usually cancel a policy due to a material change that has occurred, such as allowing a newly-licensed driver to operate the vehicle or using the vehicle for a different purpose. With pro-rata cancellations, the refund amount is computed based on the remaining length of the policy. This means the insured only pays for the number of days the insurance contract was in effect. The pro-rata method ensures that policyholders are not penalised for early cancellation and receive a fair reimbursement for unused coverage.

Short-Rate Cancellation

Short-rate cancellations occur when a policyholder decides to terminate the insurance policy before the expiration date. In this case, the insurance company calculates the refund based on a formula that considers both time and risk, resulting in a less favourable outcome for the cancelled policyholder. The formula involves charging a higher rate for the period the policy was in force than the standard rate for the same period. Short-rate cancellations include a penalty as a disincentive for early cancellation, covering the administrative costs incurred by the insurance company. This penalty amount is typically calculated using "short-rate cancellation tables" provided by the insurance company.

When to switch

While you can switch your auto insurance provider at any time, there are certain events that warrant the switch sooner than later. Here are some circumstances that signal it's time to start looking for a new carrier and getting quotes:

• Moving to a new location: Your insurance rate is impacted by your location. Even moving within the same city or state can affect your rate. It's a good idea to inform your insurer if you're moving to a new ZIP code, city, or state.
• Adding a driver or vehicle: Adding a new vehicle or driver to your policy usually increases your premium. If you add a teen driver to your policy, you're likely to see an increased rate. Shopping around for quotes from different insurers can help you find a more competitive rate.
• Life changes: Life events such as getting married, retiring, turning a milestone age, or buying a new home can impact your insurance rate. Since each insurer uses its own algorithms to determine rates, you may benefit from comparing quotes from different companies during times of transition in your life.
• Policy renewal date approaching: Switching insurance providers during your renewal period can help you avoid cancellation fees. Ensure that your new policy starts on the day your old policy expires to avoid gaps in coverage. Some insurers may also offer a discount if you switch before the expiration of your current policy.
• Increase in premiums: If your current insurer has increased your premiums, it may be a good time to see if another carrier can offer a more competitive rate.
• Reviewing your options: Even if you're happy with your current company and premium, it's a good idea to review your options periodically. You may discover that another insurer offers lower rates or additional benefits that better suit your needs.

While these circumstances may prompt you to consider switching auto insurance, there are also times when changing providers may not be advisable. For example, if you have a pending claim with your current insurer, it's generally recommended to wait until the claim is resolved before switching. Additionally, if you have a loyalty discount with your current insurer, switching may result in losing that discount.

Cancelling your policy

Cancelling your auto insurance policy is a simple process, but there are a few things to keep in mind. Firstly, check with your insurer to see if they require any cancellation fees, a cancellation letter, or a notice period before they'll let you cancel. Some insurers may charge a cancellation fee, also known as a short-rate cancellation charge, to cover administrative costs associated with processing the cancellation. The fee may be a percentage of your unused premiums or a fixed amount, and it's usually outlined in your insurance contract.

Secondly, it's important to arrange for new insurance before cancelling your current policy to avoid a lapse in coverage. This is especially crucial if you're keeping your car, as driving without insurance is illegal in many states and can result in fines and other penalties. Make sure your new policy starts on the same day your old policy ends to avoid any gaps in coverage.

Thirdly, notify your insurer of your intention to cancel. Contact your insurance agent or company, either by phone, mail, fax, or in person if they have a physical location. Provide them with the necessary information, such as your name, policy number, and the effective date you want your coverage to end. They may require you to sign a cancellation form or letter.

Finally, confirm the cancellation and receive any refunds for prepaid premiums, minus any cancellation fees. Your insurer should provide you with a notice of policy cancellation, and they may also notify your state that you and your vehicle are no longer insured.

Overlapping coverage

Overlapping auto insurance policies, or double coverage, can occur for several reasons. For instance, some dealerships offer automatic insurance coverage when buying a new car, and you may find a cheaper alternative elsewhere before the dealership's coverage ends. Similarly, some couples choose to combine their insurance plans to save money, but this requires discontinuing the original plan first. Other reasons for overlapping coverage include automatic policy renewals, confusion over renewal dates, and a desire for extended coverage.

While overlapping coverage is not always intentional, it is never a good idea. In the event of an accident, neither insurance company may be willing to pay out on a claim. Both companies may argue over which of them has to pay, leaving you without coverage despite paying double premiums. Even if you have two policies, you can still only make one claim, as making more than one is considered fraud. This is known as unjust enrichment, which is illegal. Furthermore, you will likely face a significant increase in your renewal price and lose your no-claims bonus from both providers.

To avoid overlapping coverage, be sure to contact your old insurance company and inform them that you are switching to a new provider. Ask for a prorated refund on your old policy if you cancel early. Get a statement in writing from your old company that includes the date the policy will end, and start your new coverage on the same day. You can also ask your new insurance company to backdate your policy; in some states, policies can be backdated for up to 60 days with a letter stating you had no known loss during that time.

Frequently asked questions