Have you ever bought a car? Rented an apartment? Visited a doctor? Chances are, if you’ve done any of these, you’ve run across one very important item: insurance. Right?
We've all purchased an insurance policy at some point. But what happens when your coverage just isn’t cutting it anymore? You do the same as you would with any other problem: find a new solution.
What you will learn:
- Types of policy cancellations
- Flat cancellation
- Pro-rated cancellation
- Short-rate cancellation
- Cancellation Fees
Insurance Policy Cancellation Types.
Here’s the thing about insurance policies: they are contractual agreements. But what happens when you cancel your insurance policy?
While it’s not something you want to make a habit out of, it can be done. However, there are consequences.
Let's take a look at a few policy cancellation routes the insurance company might take to recover from the loss of your business:
A flat cancellation occurs as of the policy effective date, meaning the insurance company has not assumed liability and the paid premium is returned in full.
Example: Let’s say you signed an agreement with an effective date of 1/1. If you cancel the policy as of 12/31, your premium for the following year is returned in full because you never had coverage under this policy.
Also known as pro rata cancellation, pro-rated cancellation involves canceling a policy a portion of the way through. The unearned premium would be returned for the period of coverage you waived.
Example: You choose to cancel your policy after being in place for 6 months of the agreed upon year. Your initial premium was $1000. After the cancellation is processed, you receive $500 back.
Finally, short rate cancellation is determined wholly by the insurance company. This form of cancellation serves as a deterrent to cancellations and retains more of the unearned premium that would be returned under normal circumstances.
A short rate penalty might be the pro rata amount multiplied by an additional percentage, if not determined by a short rate table in the policy.
Example: Following the above example, you proceed with your cancellation 6 months in and receive $400 back from the insurance company. But how did you lose a whole $100 between the pro rata amount and the short rate amount?
The unearned premium was calculated at the pro rata amount ($500) minus an additional 20% ($100). This additional 20% was the cancellation penalty.
A Rise of Short-Rate Fees.
After learning about the differences between the cancellation types above, which one stands out?
Short-rate cancellation is obviously the least beneficial for those choosing to place their business elsewhere. Because it is determined by the company, it is often manipulated and those canceling are subject to the whims of the insurance carrier.
More common than ever, the occurrence of short-rate fees is rising and often without the knowledge of the public. If you've read an insurance policy, you would know that it is extremely difficult to make it past the overview section.
Insurance is one of the more technical industries comprised of complex terms and legal jargon. The results are disengaged readers. Companies can take advantage of the fact that most will not read through word for word and tuck the short rate cancellation penalties somewhere in between.
So now that you know the consequences, how can you avoid those that are unnecessary?
- Find yourself a reliable, trustworthy, and dependable agent. While you might not be well educated enough to ask about the intricacies of your policy, your agent will.
- Keep in mind where you want to be over the next year. If you are planning on growing your lifestyle or business, factor that in when choosing coverages.
- Shop around. It has never hurt anyone to look around for the best option. You’ll not only find the best solution for you, but you gain a bit of perspective about the market for the future.
- Already have your policy? Take a few minutes and glance it over. Check out what your insurance company would do if you wanted to cancel.