Auto Insurance

What are the rules and penalties around switching your car insurance?

By: Dominic Licorish on January 17, 2020

One of the best ways for people to save on their car insurance premiums is switching to a cheaper provider. You need to be careful though, because cancelling an auto policy often comes with a few surprises.

You might have to pay a fee for early cancellation with some insurers. You also have to think about whether you’ll need to pay any fees or deposits to the new company. Every company will have its own terms and conditions around cancelling or opening up a policy. The best thing to do if you’re thinking about switching your auto insurance is to read your policy and talk to a representative of your insurer.

Here’s a quick and easy breakdown of the process to get you started.

What happens to your premium?

Either you signed up to pay a monthly premium like most people do, or you agreed to pay for a full year in advance — which can save you money with some insurers. Either way, your coverage is based on an annual agreement. Going back on that deal means less money for that company and they don’t like that. It also comes with administrative costs that they have to cover. Depending on when and why you cancel your policy, the penalties for cancelling are often different.

Despite the unique differences each insurer will have, there are two main models insurers use when someone cancels their policy: short-rating and pro-rating. To put it simply:

  • Pro-rated cancellations will refund you the full amount of an unused premium

  • Short-rated cancellations will take an amount of the refund as a penalty for cancellation

For obvious reasons, pro-rated cancellations are better than short-rated ones for saving you money. If you cancel a policy after four months with a pro-rated system you’ll get eight months of your premium back. In a short-rated system, you’d only receive part of that amount, depending on the specific policy set out by the insurer. The company could take a percentage out of your total refund or it could charge a flat fee. Some companies only short-rate earlier in the policy. Others may use short-rate at any point in the policy.

New policies don’t come free: fees and down payments

Other information you’ll need to know is how much it costs to start a new policy at whatever provider you’re switching to. Aside from administrative fees, some companies charge down payments when starting a monthly payment plan. For example, Allstate Canada requires a two month down payment at the start of your annual term.

Do some math

After figuring out what kind of cancellation method your insurer uses and how much you’ll need to pay to set up your new policy, the next step is figuring out if it’s actually worth it to switch. Dust off your calculators (or just open up the app on your phone, I guess).

If the cost of cancelling your old policy and switching to a new one end up costing more over the same time frame than it would to stay on your current coverage then it makes more sense to wait and renew when your policy ends.