Whether you are unhappy with your current rates or some other aspect of your auto insurance, you can always change to a new company. Before making the switch, however, consider just how much you will save and how much it will cost you. Insurance companies often charge penalties for early cancellation, and you will need to take into account any fees or down payments the other company may require as well.
Cancellation Penalties: Short-rating versus Pro-rating
Insurance companies determine how to handle a cancellation based on the terms you agreed to when signing up. Early cancellation involves administration costs and loss of the insurance premiums the company would otherwise collect during the full term of the coverage, usually a year. Each company has their own policy regarding cancellations, and the penalties often vary based on the circumstances of your cancellation (when and why).
There are two basic methods by which insurance companies may refund your cancelled policy: short-rating and pro-rating. Essentially, short-rating means the insurance company takes a cut of the return to cover the costs involved in the cancellation, while pro-rating means you get a full refund of the remaining premium back. For example, if you have a year-long policy and cancel after four months, you will get back eight months worth of premium on a pro-rated system. If the company short-rates the cancellation, you’ll lose some of that remaining premium, dependent on the company’s policies. Short-rating may occur may apply at any time, or may only apply early in the policy term.
Prior to cancelling, ask your insurance company which method they will use, and find out how much money you stand to lose if it’s a short-rating situation. You will need this information in order to determine if the savings presented by your new policy will make up for the difference.