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What you need to know about cancelling your car insurance policy early

February 9th, 2020  |  Auto Insurance

When it comes to auto insurance, making the switch to a new company is always an option.

Whether you’re unhappy with your rates or some other aspect of your insurance, there are a few things you should know before making the leap.

Insurance companies sometimes charge cancellation fees for early cancellation. You’ll need to know how much they are and whether the company you plan to switch to requires a down payment or any additional fees. When all these figures are considered, you’ll have a better idea of the overall cost before you cancel early.

To find whether you'll save money, calculate how much you will save over the policy term on premiums alone. Then, subtract the costs of early cancellation. If you come out ahead, then cancelling right away is the right choice.

Best time to shop

Generally speaking, the best time to shop around is when your policy renewal is approaching. It will help you avoid cancellation penalties and allow for a smooth transition into your new policy. Comparing rates will tell you if you're overpaying, and by how much. It’s a good way to keep tabs on what other companies are charging and make sure you aren’t paying more than you should be

Whatever you do, don’t just stop paying your premiums. If you do, while your insurance company will ultimately cancel your policy, it could become a black mark on your record causing future companies to consider you a high-risk driver.

If you’ve made the decision to switch, cancel your insurance properly and pay any necessary fees.

For the insurer, early cancellation means the loss of premiums and administrative costs. When the insurance company rates its premiums, it does so on the full term of coverage which is normally a year. Read your policy for the exact information about your company’s rules and fees regarding cancellation.

Refund methods

When you cancel, there are two methods auto insurance companies can use to process refunds: short-rating and pro-rating. A pro-rated cancellation gives you back the entire amount of the unused premium, while a short-rated cancellation takes a certain amount out of the refund as a penalty for early cancellation.

The Financial Services Commission of Ontario allows auto insurance companies to use short-rating to account for any administrative fees associated with cancelling the policy.

For companies using a pro-rated system, if you have a 12-month policy and cancel after three months, you will get back nine months' worth of premiums. However, if the company is short-rating the cancellation, you will lose some of that remaining premium.

While exact short-rating fees depend on the policy, you'll likely pay more fees the earlier you decide to cancel. Before switching, ask the insurer which method they use and find out how much money you would lose if it’s a short-rating situation. You’ll need this figure to determine whether the savings on your new policy makes up for the difference.

If you decide to make the switch, make sure you have no gap in coverage when changing insurers. Any period where you are uninsured can lead other insurance companies to raise your premiums down the road.

As always, if you have any questions about cancelling your old policy or the new one, be sure to talk to your insurance broker.

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