Many people decide to wait until the insurance renewal date before canceling their policy, because they want to avoid paying a penalty. But sometimes, staying with your insurance company just to avoid a penalty isn't the best option.
Here are some factors to think about when trying to decide whether you should cancel your policy before its renewal date.
- Before you cancel an insurance policy early, you should check the fine print to be aware of any penalties or fees you might incur.
- There are also hidden penalties to consider, such as losing a multiline discount or other rewards you currently have.
- Compare the total costs of leaving your current policy with the long-term savings you'll gain on a new policy before you make the switch.
What Might Happen if You Cancel Your Policy?
Be aware that, in some cases, you may end up owing money if you cancel your policy early.
Insurance companies finance their policies for a certain length of time. If the terms of a policy are met, 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. There may be a penalty that has to be paid as well as any other fees.
Many companies do not charge cancellation fees. Your policy should state whether any penalties apply for ending coverage before the renewal date.
What Should You Consider Before Canceling Your Policy?
It still may be worth canceling your policy even if you'll incur a penalty. Before you drop your coverage:
- Ask for the specific cost of the "penalty." You may be surprised by how many insurance agents cite a penalty without even knowing its cost. It could be $20, $500, or any other estimate. The exact amount should make a difference in the decision you make.
- Compare the cost of the new policy to the cost of the one you want to cancel. Let's say the price difference is under 10% per year. In that case, you could try getting your current insurer to match the new price. This small amount should not be a big deal to an insurance company, especially if your account is in good standing, and you have multiple policies with the company. If it does not match the price, figure out whether you would end up ahead once you pay the penalty. If you end up even (or close to even), you have to decide whether the new policy is worth the effort.
Be careful if you get a rate quote that is much lower than your current rate. Make sure you go over all details to fully understand the costs.
- Compare the policy advantages and coverage of the new policy to your current one. Your current and potential insurers should be able to help you focus on the top features of the policy you have or are thinking about. If a new company is able to offer you services that better meet your needs or policy features that are valuable to you, it may be worth paying more to switch.
- Understand payment terms. Insurers often have varying payment policies. You should make sure to find out the terms of these policies and choose the one that works best for you.
- Find out whether there will be consequences as a result of canceling the policy in question. Often, people find cheaper car insurance with a new company and decide to switch, but they might leave their home insured by their original insurer. They then get an awful surprise when their rate increases. That's because they lost their multi-policy or bundling discount. Look at your entire insurance portfolio; make sure you know all the facts before making a decision. You should ask yourself: Will changing one policy affect the cost of coverage on another?
The Bottom Line
While many companies will let you off the hook without a fee, that's not always the case. It's always a good idea to shop around. Make sure you're getting the best deal for your insurance needs.
But be sure you understand the costs of making a switch before you get a sudden surprise with your final bill.