Most home and auto insurance companies will refund your unearned premium after you cancel your policy and they calculate the refund on a pro-rata basis. This simply means that if you paid for a full year of insurance and you cancel your insurance roughly six months into the policy, you’ll receive a refund of roughly six months of unearned premium.
But did you know that there are a couple other types of cancellation refunds you should be aware of?
One is called the short rate cancellation and the other is called minimum earned premium. A short rate cancellation is a type of cancellation that is intended to disincentivize the insured from canceling the policy before the expiration date. With a short-rate cancellation, the insurance company is entitled to retain a larger percentage of the unearned premium when compared with pro rata cancellation. Generally, a short rate cancellation schedule would be included in your policy. In these situations, if you were to cancel roughly six months into a 12-month policy, instead of receiving a 50% refund…you may only receive a 45% refund.
The other type of cancellation refund is minimum earned premium. Often, an insurance company will set a minimum earned premium amount to serve as a deterrent to early cancellation. The minimum earned premium is typically set as a percentage of the total premium and generally covers a portion of costs associated with issuing a policy. Like the short rate cancellation, the minimum earned premium percentage would be noted in your policy, if applicable.
Keep in mind that these situations are not common to your standard home and auto insurance policies, however, if you’re seeking insurance in the surplus lines market because you have a higher risk scenario….you’ll want to ask if there are any special cancellation provisions within the policy before agree to purchase the policy.
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