For whatever reason, you have decided that your relationship with your insurance company has come to an end. Whether you're replacing your coverage with another insurer or not, you want to cancel your existing policy and get a refund for the premiums you've already paid. Whether you get a refund, and how much of it you get, depends on a number of factors.
Determining Unearned Premium
Though you pay your insurance premiums monthly, periodically or annually, the cost of the insurance is calculated on a per-day basis. Therefore, when you cancel your policy, the insurer can determine exactly how much to charge you up to the date of cancellation. If you have paid more money than the company earned by keeping the policy in force to the cancellation date, the excess is called unearned premium. This is what you hope to recover as a refund.
Laws governing the insurance industry are crafted and enforced by every state, and therefore the laws may be different depending on where you live. As a general rule, you can expect a refund approximately equal to the amount of your unearned premium when you cancel your policy, because insurers are typically required to do this. However, there are factors that could diminish or even eliminate your refund.
Some types of insurance require audits to determine the exact amount of unearned premium. You may face a premium audit if the insurer discovers information about you that you did not disclose on your application, and must recalculate the amount of money it should have charged. If you refuse to cooperate in a premium audit, or if the amount determined by the audit remains in dispute, the insurance company may not be legally required to refund your unearned premium. California, for example, permits this exception.
Some states permit insurers to issue short-rate cancellations, meaning they withhold an administrative fee from the unearned premium amount. Though insurers are typically able to set their own short-rate rules, the fee amount is generally 10 percent of the unearned premium. Additionally, some broker fees or commissions may be "fully earned" upon policy inception, meaning they are not subject to refund. If your unearned premium is equal to or less than the fully earned fees or short-rate amount, you may not receive a refund, and may end up owing the insurer money.
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