This article has been updated from a previous version.
Everyone knows that one of the easiest ways to save on car insurance premiums is by switching to a cheaper insurance provider. However, to reap the savings early, you may need to cancel your existing policy and that can come with enough fees to make you think twice.
Every company will have its own terms and conditions on cancelling or reinstating an auto insurance policy. Some insurance providers impose a fee for canceling a policy before the term is up. If you’re thinking about switching your auto insurance policy, the best thing to do is to read your policy and talk to a representative from your insurance company. To get you started, here’s a quick and easy breakdown of the process:
What are the penalties and fees that come with switching?
Whether you signed up to pay a monthly premium or agreed to pay for a full year in advance (which can save you money with some insurance providers), your coverage is based on an annual agreement. Going back on that deal comes at a loss to your insurance company. Plus, they will have to cover the administrative costs to process the cancellation. That’s why, depending on when and why you cancel your policy, the penalties for cancelling can differ.
Despite each insurance provider’s unique differences, there are two main calculations insurance companies use to figure out both the fees to impose and how to pay out an unfinished premium 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 consumers, pro-rated cancellations are more advantageous than short-rated ones. 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 insurance provider. The company could take a percentage out of your total refund, or it could charge a flat fee. Some companies only use the short-rate method earlier in a customer’s policy, while others may introduce it at any point during the policy.
Other information you’ll need to know is how much it costs to purchase a new policy with the insurance 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 your math before making the switch
After figuring out what kind of cancellation method your insurance provider 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 calculator and run the numbers.
If the cost of cancelling your old policy and switching to a new one ends up costing more than it would to stay on your current policy over the same time frame, it makes more sense to wait and renew when your policy ends. However, if your new premiums pose significant savings and the fees are minimal from your old insurance company, then it’s a no-brainer.
Either way, you won’t know whether you’re paying the best price on insurance until you compare your options.
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About the author
Dominic Licorish is a freelance writer for LowestRates.ca. When he's not working, he spends his time writing movies and wandering the streets of Toronto with a camera.