The Penalties for Canceling an Insurance Policy
Many people decide to wait until the insurance renewal date before canceling their policy because they want to avoid paying a penalty. In some circumstances, however, staying with your insurance company just to avoid a penalty may not make the most sense.
Here are some factors and issues to consider when trying to determine whether you should cancel your insurance policy before its renewal date.
What Should You Consider Before Canceling Your Policy?
You should keep in mind the following checklist of items.
- Ask for the specific cost of the "penalty." You may be surprised by how many insurance representatives cite a penalty without even knowing the penalty rate. The penalty could be $20, $500, or any other estimate. The exact amount should make a difference in the decision you make.
- Compare the annual cost of the new policy to the annual cost of the policy you want to cancel. If the price difference is under 10% per year, you could try getting your current insurer to match the new price. 10% should not be a big deal to an insurance company, if your account is in good standing, and if you have several policies with them. If the company does not match the price, then you should try to calculate whether you end up ahead once you pay the penalty. If you end up even (or close to even), you have to decide if the new policy is worth the effort. You should do what is convenient for you. You are the client, and it is your money.
Always be cautious if you get an insurance rate that is significantly lower than your current rate.
- Compare the differences in policy advantages and coverage between the new policy and your current one. Representatives of your current and potential insurers should be able to help you focus on the top features of the policy you have or are considering. If a new insurance company is able to offer you services that meets your needs better or policy features that are valuable to you, it may be worth paying more to switch. You should choose a policy that best fulfills your needs.
- Understand payment terms. Insurance companies have varying payment policies. You should make sure to study the terms of these policies and find the one that works best for you.
- Determine if there will be consequences on other policies as a result of canceling the policy in question. Often, people find cheaper car insurance with a new insurance company and decide to switch while leaving their home insured by their original insurer. They then get an awful surprise when their rate increases because they lost a multi-policy discount or access to special policy enhancements. You should evaluate your entire personal insurance portfolio and make sure you know all the facts before making a decision. You should ask yourself: Will changing one policy affect the cost of or coverage on another?
What Might Happen If You Do Cancel Your Policy?
You may end up owing money after canceling your policy.
Insurance companies finance policies for a certain time period. If the terms of a policy are respected, then the monthly payments will cover the total cost of the policy by the end of its term.
The cost of insurance changes if the term is reduced to less than the original contract term. When the term is cut short, your monthly payments no longer meet the schedule. You may end up owing money - even after your policy is canceled - because of the penalty that has to be paid as well as any additional fees.