Can you cancel car insurance at any time? This has been a trending question during the current pandemic where people are spending more time working from home and less time commuting to work. The answer is that you’re free to cancel your car insurance if you wish to do so.
Will I be required to pay a fee? Again the answer is yes and no. There are circumstances where the insurance company will decide to charge a cancellation fee, particularly if you choose to cancel the insurance before it expires.
Typically, car insurance in Canada works on a 12-month policy term. The insurance company accepts the responsibility for providing insurance coverage for the entire year, and you make a commitment to pay premiums to enjoy this privilege.
Driving without insurance in all Canadian provinces is against the law. There are steep penalties and fines in case you get into trouble. Therefore, when canceling the insurance, it’s important to shop for a new one or get temporary car insurance in the meantime. You can explore options on Surex, a marketplace for insurance in Canada.
How to cancel car insurance without charges
The most plausible way to avoid paying the penalty is to wait until the renewal date or expiry date to cancel the policy. But it’s not always sensible to wait until the renewal date to cancel. In fact, you may receive a higher refund for a prepaid insurance plan than the deductions the insurer will make.
How do policy cancellations work, and why does the insurance company charge a fee?
See, when you cancel the insurance policy before the stipulated one-year period is over, the insurer will charge a short rate cancellation penalty. They also calculate the amount of money you owe them for the time they insured your car.
Assume that at the beginning of the year, you prepaid $730 in insurance premiums. Based on this assumption, each day of coverage costs about $2.
If you cancel the policy after 100 days, the insurance calculates the earned premium. You can think of it as the company’s cost for insuring your car and assuming risk. So for 100 days at $2, the earned premium comes to $200.
The insurance company may charge a penalty if the term is not yet over. They calculate the penalty amount based on the time the policy was in effect. For instance, if you cancel the insurance after 100 days, the policy was in effect for 27.3% of the term.
Each car insurance company has different percentages that they impose based on the time on risk. These costs are detailed on short rate cancellation tables. For instance, they may specify that you still owe 33% on the total cost of the insurance based on their percentages. That works out to: 0.33 x $730 = $240.9. If you’re paying about $2 per day and $200 for 100 days, the penalty works around to $40.9
The short rate of $40.9 is meant to cover the administrative costs that the company incurred to set up the policy. That’s why it’s almost impossible to cancel car insurance before it expires without incurring any penalties.
How can I know the short rate cancellation penalty?
The cancellation penalty is not always a flat fee. In fact, if you cancel the policy near its completion, for instance, after 10 months, you will pay less in penalties than a person who is canceling after 1 month of coverage.
You can also consult your car insurance website to find out if they have an insurance cancellation calculator. It’s also advisable to go over the terms of the insurance policy document. If you cannot find the specifics about the cancellation rates, take the next step, and contact the insurer and ask to speak to an authorized representative. Inquire for the specific short rate cancellation penalty that you need to pay.
They may ask you to confirm in writing that you want to cancel the car insurance policy. During the cancellation procedure, the insurance company will ask for your policy number, personal information, and the date you want the cancellation to take effect.
Make sure that you cancel automatic payments
Do you pay your insurance premiums on a monthly basis? It’s likely that you may have set up automatic debits. Each insurance company will have a stipulated period during which you have to give prior notice. For instance, if you have to give three days of prior notice, the payment may be withdrawn from your account if you cancel the policy two days prior to the payment.
One way to avoid these extra charges and the complications of receiving a refund afterward is to stop the automatic payments by contacting your bank. You also have to inform your lender or bank that you have canceled the insurance policy if you’re still paying off a car loan.
In most cases, the auto loan provider will not allow you to cancel your insurance coverage without providing sufficient proof of your new insurance details, including its effective date and policy number.
What happens if I cancel my car insurance
Canceling your car insurance means that you will no longer be insured from damages and costs in the event of an accident. It also puts you at the peril of receiving a driver’s license suspension for up to one year if you drive a car without insurance. The car may be impounded for up to three months and you will need to pay a fine. After canceling your car insurance, don’t under any circumstances drive the car on public roads.
Gaps may also result after canceling the insurance and applying for a new one. If there happen to be gaps in-between the coverage, your driver risk status may increase, and you may need to pay more in premiums on new coverage.
Is there an alternative to canceling my car insurance without incurring extra charges?
Alternatively, you may consider adjusting your policy if you’re happy with your current provider but need to save money because you are not taking out your car as often as you wish. For instance, you may downgrade from comprehensive car insurance to third-party car insurance. Several insurance companies have also begun offering discounts, particularly during the current pandemic.
The Bottom Line
If you have more questions on how to cancel car insurance and whether it’s a good move, you can speak directly with your broker. You may also seek help from your new provider. You may actually find out that not all insurance companies charge the short rate cancellation fee. Even after canceling your policy over the phone, it’s always advisable to follow up with a written request such as a letter.