The Penalties for Canceling an Insurance Policy

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Many people decide to "wait until the insurance renewal" before canceling a policy because they want to avoid an insurance penalty. Staying with your insurance company just to avoid a penalty may not make sense, depending on the reasons you want to change insurance company.

Sometimes it will save you more money to cancel your policy mid-term and pay the penalty to change to a new insurance company if the price is significantly less with your new company. Also note, the longer a policy has been in force the smaller the penalty is to cancel.

Here are some factors for you to consider if you are worried about the cost of an insurance penalty for canceling your insurance before the renewal date.

Canceling Your Insurance Policy Before Renewal

Here is a checklist of items that will help you make the best decision for your circumstances.

  • Ask for the specific cost of the "penalty." You may be surprised how many representatives are citing a penalty and haven't even calculated the penalty rate. You might be talking about a $20 penalty or a $500 penalty. This makes a huge difference in your decision. 
  • 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 may try and get your current insurer to match the new price before changing company. 10% is not a big deal to an insurance company if your account is in good standing, and you have several policies with them. If they don't match the price, then calculate for yourself if you end up ahead once you have paid your "penalty." If you end up about even, you have to decide if the new policy is worth the effort. Do what is convenient for you. You are the client and it is your money.
  • Compare the policy advantages and coverages from the new policy to your old policy. Your current representative should be able to help you highlight the top features. You can then decide if the features are valuable to you.
  • Determine if there will be consequences on other policies as a result of canceling the one you are looking at it. It often happens that people find cheaper car insurance with a new insurance company, and decide to switch, but leave the home with the original insurer. Then they get an awful surprise when their rate increases because they have lost a multi-policy discount, or special policy enhancements or advantages. Always evaluate your entire personal insurance portfolio. Get all the facts before you make a decision. Will changing one policy affect your cost or coverage on the other?
  • Do you like the services or the interaction with the new company better? What advantages are they giving you? If a new insurance company is going to offer you service that meets your needs better or policy features that are valuable to you, it may be worth paying more to switch to someone you feel you can work with. Sometimes dealing with a pleasant representative, or a company with a good culture makes the entire experience worthwhile. Insurance is difficult enough, it may be worth paying more and dealing with people who make it easy.

Paying a Penalty On Your Insurance May Save You Money

Once you have calculated all the factors, you may be far better off paying a one-time penalty of let's say $50 to get better service, better coverages or better rates. Every month you stay with an insurance company that you do not like, that is too expensive, or that has lesser coverage puts you at risk.

Remember your insurance is there to pay you in the event of a claim. You don't know if the claim will happen before your next renewal, or after - maybe never. Consider how much it will cost you if you stay with an insurance company that has less coverage and you have a major claim.

Other Things to Consider Before Canceling

Always be cautious if you get an insurance rate that is significantly lower than your current rate. Before committing to the new policy, or canceling the old policy, it is worth waiting to see the new policy issued and make sure it represented all of your needs.

In automobile insurance, for example, it is not uncommon to forget claims, or traffic violations when applying for new insurance. At the point a new company quotes you, they may not have necessarily run all the checks on your personal information.

These checks are usually reserved to when a policy is actually required or being issued. Many times, it is only then that you will receive a call or notice advising you the new price is actually higher due to newly found information.

Insurance companies are businesses, and like any other business, if you have all your policies with the company, or have been with a company for many years, it makes your relationship stronger. On a day to day basis, this may not seem important, however, if there is ever a difficult time, for example, you are threatened to be canceled, or you have too many claims, then the value of having been with one company for many years may become evident. Underwriters may look at your history with the company when evaluating your situation. This also allows your representative to let you know about new opportunities that you might be eligible for and helps them keep an eye out for your best interests.

How Payment Plans Work With Insurance Companies

Insurance companies have strict guidelines on payment policies. In general, the payment of an insurance policy is due when the policy comes into force. So if you have not paid your premium by the due date of the policy (the renewal date, or the date the policy comes into effect), then your payment may already be past due.

The exception is when you have made a payment arrangement or payment plan. The payment plan helps divide the annual cost of the insurance over a term of your choice, with a payment method of your choice.

Each insurance company is different, so part of your evaluation of which insurance company you will work with should involve understanding their payment terms and making sure they are convenient for you. Many insurance companies may take 2/12ths of the premium on the first installment. Find out all the details before you sign on, to make sure you will not have a payment problem or get canceled.

Why You May Owe the Insurance Company Money When You Cancel a Policy

People often misunderstand the payment plan concept of an insurance policy. They think that it is like a gym membership or other monthly pay-per-use plan. This is how it usually works: The insurance company is financing a policy for the term of one year. If the term of the policy is respected, then the monthly payments will cover the total cost of the policy by the end of the term.

However, unlike services or products you might buy in a store, the cost of insurance changes if the term is reduced to less than the original contract term. This is why when you ask to cancel a policy mid-term, you may pay a “penalty”, or have your refund for the insurance not used calculated on a short-rate instead of a pro-rated basis. Short-rate means with the penalty.

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 short-rate cancellation, and/or any other fees that would have been added due to canceling your insurance contract early.