It’s happened to all of us. You’re halfway through your contract and you find a better deal somewhere else.
Sometimes you just suck it up and keep paying, knowing that you’re bound by the terms of the deal and have little hope of getting out of it. The people who have tried to extricate themselves from a mortgage or cell phone contract know the feeling.
But what's the case for car insurance? Let’s take a closer look.
Cancelling a policy
Say one day you decided to use the LowestRates.ca car insurance comparison tool to see if you’re paying too much to insure your car. As I found when I searched online to find a better deal, it turns out you can save some serious cash by switching to a different insurer.
Cancelling your existing car insurance isn’t quite that easy, especially if you’re already locked in for the whole year. If you’re only on month six of a year-long contract, you’re almost certainly going to pay a penalty for getting out of it. Depending on how much of your policy is still left, the penalty could be anywhere from 5-10% of the total annual price of the plan, maybe even more.
Once you pay that fee, the new deal on car insurance has to be pretty enticing in order to make it worthwhile. That’s not saying that cancelling your car insurance mid-contract is a bad idea, it’s just that you’ll want to make a call to your existing insurer first.
Getting a new policy
This next part is very important. You can’t just cancel a policy without having a new one in place. Not only is driving a car without valid insurance illegal (even for a day or two), but if you can’t get new insurance then you’ll have a car that can’t be driven anywhere.
Here’s what you need to do. Once your new insurer has gotten your policy ready, only then is it time to tell the old one to take a hike. Not only does that mean you’ll have to come up with some cash up front to pay for the new coverage, but it also means you’ll likely be paying for overlapping insurance policies for a day or two. Once new insurance is in place, contact your old insurer to officially cancel the policy. Don’t count on the new insurer to do it either.
Minding the gap
Many drivers worry about their premiums spiking if they do somehow end up with a gap in their insurance coverage. If your old coverage lapses before you get a new policy, will your insurer hold that gap against you and jack your premiums?
It's a legitimate concern. The good news is that insurers can't penalize you for gaps in coverage unless your policy was cancelled for one of three key reasons: (1) your driver's license was suspended, (2) you didn't pay your premium, or (3) you had an accident or conviction and did not notify your insurance company. Basically if you are a good driver and a conscientious insurance customer you'll probably be ok.
Horror stories of going without
I know it might be tempting, but it’s a really bad idea to go without car insurance. Saving a few dollars on insurance now isn’t worth it if you get a ticket or get into an accident.
Depending on your province, getting caught by the police without insurance can be pretty costly. In Ontario, the fine is $5,000, plus $1,000 for a surcharge. In Alberta, the fine is $2,875. That’s less than Ontario, but it is still a lot of cash.
More important is what happens if you cancel your car insurance and then get into an accident. Normally your insurance company takes care of it and will just increase your policy if you’re at fault. It’s not a pleasant experience, but it could be a whole lot worse.
If you don’t have insurance, the other insurance company doesn’t have the option of hitting up your insurance company for payment. So they’ll turn to you instead. You’re looking at a bill of $10,000-$100,000 to pay for the other guy’s damages, plus the cost of a no insurance ticket. And then once you try and get insurance again, you’re likely paying $400 or $500 per month. Ouch.
One last thing. If you have a financed car, your lender is listed as first loss payable on your insurance. You can’t blame them for this, they want to get paid out if you crash. If you cancel your car insurance, the lender will be notified. If they’re not immediately notified of a new insurer taking over, I’d be expecting a phone call, and it probably won’t be too nice.
The bottom line? Don’t just cancel your car insurance unless you have another policy in place. But if done carefully, cancelling and then switching to a new company can save you money.