# How to Figure Out the Penalty for Canceling an Insurance Policy

When you call your insurance company to cancel your insurance, they may tell you there is a penalty.

The way to calculate the penalty is to ask the difference between the pro rata (no penalty) cancellation rate and the short rate (with penalty) cancellation rate. Whoa! Sounds complicated right? It's not, but your reaction to this is exactly what people count on when they discourage you from canceling a policy mid-term and warn you of this mysterious penalty.Your representative will understand how to calculate it and should be able to figure it out for you.

If they don't give you the information you need, you can figure this out with the following:

• Your policy start and end date
• The date you want to cancel your policy

### Walk-through of How to Calculate the Penalty for Canceling a Policy Early

In olden days, insurance company employees or representatives would use a "wheel" to figure out the number of days a policy was active to figure out the charge for when a policy was canceled. The reason this is important is because the short rate changes every couple of days that the policy is in force. The closer you get to the expiry date of the policy, the smaller the penalty becomes.

The penalty for canceling a policy early is calculated using a very basic chart. The chart, usually found in your policy wording, shows the numbers of days a policy could be in force, and rates of cancellation (premium retained, expressed as a percentage of the annual)  By comparing the percentage retained for the short rate and the percentage retained for the pro rata, you will have the answer to what it will cost you (in a percentage factor) to cancel your policy early represented as a percentage of your annual premium.

### A Tool To Calculate the Penalty for You

If you really want to know the exact amount in dollars, you can use the following method as a guide:

Although there may be many sites that help figure out how many days a policy is in force when canceling mid-term, the one linked here is especially simple to use.

• Enter the date you want to cancel your policy
• The date your policy was effective
• The date (usually exactly one year later) that it expires
• It will then show you the number of days that the policy is in force (Days in effect).
• To see the difference in pro rata versus the short rate, you can enter your annual premium in the appropriate field, then choose short rate or pro rata.

It calculates the "Earned premium" for you. The earned premium is what you should have paid up to the cancellation date. If you were on a payment plan, then all amounts already paid towards your policy will be deducted from the amount due, leaving you with the balance.

Don't confuse the balance due with the penalty. The penalty is the difference between earned premium pro rata and earned premium short rate.

The difference between the short rate earned premium and the pro rata earned premium is a good indication of what your penalty will be. So now, you have a number to work with.

### Where to Find the Chart That Shows Policy Cancellation Rates

Usually, the chart can be found within your policy wording. If you can not find the chart, you can ask your representative to help you by sending you a copy, or let you know the details.

If the representative can't give you the information on the spot, ask them to email it to you. With this information, you will be in the best position to decide if it is worth canceling your policy.