Is There A Penalty For Cancelling Car Insurance?

A car insurance policy generally lasts for 12 months, and while that doesn’t seem like a long time, there are many reasons a driver may want to cancel their insurance policy early. This is why it’s important to learn about the penalty for cancelling car insurance. You may be moving to a new province or out of the country, looking to sell your vehicle, or maybe you’ve found a better rate with a different insurance company.

Whatever your reason for researching the penalty for cancelling car insurance, most car insurance policies allow you to cancel your insurance at any time. You just simply need to send a notification with the termination date to your previous insurance provider if you switch to a new insurance provider. It sounds simple enough, but you may be wondering if there is a penalty for cancelling early and if there’s anything else you need to prepare for. So, let’s break it down for you.

Is There A Penalty For Cancelling Car Insurance: Frequently Asked Questions

Is there a penalty for cancelling an insurance policy?

The short answer is: yes. You will likely have to pay an early cancellation fee to cancel your policy before your 12 months are up. After all, you are breaking your contract.

In Ontario, the majority of car insurance cancellation costs are calculated using a method known as a “short-rate.” Your insurance provider will likely charge a percentage of your annual total insurance premium that is higher than what the per-day amount would be. This is referred to as a short-rate cancellation penalty.

But will your decision to cancel stay on your record? No, not as long as you’re the one asking to cancel it. On the other hand, a cancellation will stay on your insurance record for three years if it was caused by nonpayments or criminal behaviour, such as insurance fraud or a DUI conviction. This is to help other insurance companies decide if they want to take the risk of insuring you or if they need to apply certain terms, such as requiring full payment upfront.


How is a short-rate cancellation penalty determined?

First, you need to familiarize yourself with the term “amount owing for time on risk” or “time on risk.” It’s the time between your last monthly payment (or annual payment) and the cancellation date. Your insurance company will use this amount to calculate your short-rate penalty. As every company determines its own short-rate calculation, refund amounts will vary.

A short-rate cancellation offsets the administration costs spent while building your insurance policy. A policy requires a lot of time and work to set up, which is costly for the insurance provider. As these expenses are incurred whether a policy is in effect for a week or for a year, the short-rate cancellation fees help cover them.

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Can I cancel my car insurance without a fee or are fees always part of the penalty for cancelling car insurance?

Car insurance is just like any other insurance policy, meaning that if you cancel before your 12 months are up, you will have to pay a cancellation penalty.

However, if you are in a position to wait until the end of your policy, you can choose to cancel it on the expiry date instead of renewing, and you won’t have to pay a fee!

One other less common way (in Ontario) is if your car insurance company agrees to cancel your policy via what’s known as “pro-rata.” If they agree, only the earned premium for the period the insurance was in effect will be due. Any “unearned premiums” are fully refunded. The amount paid out is proportional to the remaining time on the policy while it was in effect. For example, your insurance company may be willing to cancel your policy pro-rata if you are moving to another province but setting up a new policy there with the same company.

What happens if I cancel my car insurance?

If you want to cancel your insurance coverage early, first speak with your provider, as some may have notice requirements, such as a 30-day notice for cancellations. Once you’re familiar with the cancellation terms, you will need to pick a date and submit a written request to your insurance company, either by mail or fax. Some insurers will also accept an email or a verbal request over the phone (as long as the phone call is recorded). Your request will need to include the requested date, your name and policy number, and your chosen cancellation date. You can also visit your insurance company if there’s a physical location nearby.

Your insurance company will then process your request, and your coverage will end on the day you specified. You will receive notice, likely by mail, that your policy has been cancelled. If you’re paying monthly for your policy, you may have to make one last payment to settle the fees after you cancel.

Can I cancel my car insurance if I’ve made a claim?

Yes. As we’ve mentioned above, most car insurance policies allow you to cancel your insurance at any time, even if you’ve already made a claim. And even if you still have an open claim!

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Do I get a refund if I cancel my insurance?

Possibly, but it’s not guaranteed. Your insurance company will calculate the difference between what you’ve already paid and how much is remaining on your policy. If you paid for your policy in full, you might receive a prorated refund of the remaining balance, dependent on how long you had the policy. But if you had opted to pay monthly, you may not receive a refund at all.

Furthermore, in the event that you do receive a refund, it may not be much. Between the short-rate cancellation penalty cost and any administrative fees, your refund may be significantly less than you had anticipated.


What do I need to consider before I cancel my car insurance?

It’s important to remember that cancelling your insurance policy can have unintended consequences, especially if you’re switching providers to try to save money. Here are a few things to consider before cancelling:

Cancellation penalties

If you’re switching insurance companies to try to save more money on your premiums, make sure you take into account the penalties you will pay to cancel. Once you add those up, it may not save you as much money as you think.

Bundled policy credits

If you have more than one insurance policy with the same company, chances are good that you’ve received a discount by building your policies together, such as home and auto insurance. If you decide to cancel your car insurance, you will also lose that discount you received on your other policies, thus increasing your other premiums. So while you may save on your car insurance at another company, you could end up paying more monthly on your premiums altogether due to the loss of your bundled discount.

Uninterrupted coverage

Don’t forget to make sure that your new policy begins when your old one ends. It’s illegal to drive without car insurance, so you need to ensure that you won’t be stuck without it for a few days while you’re waiting for your new policy to take effect. Also, don’t forget to let your new insurance company know when your current coverage will end.

New insurance company fees

Your new insurance provider may have administration fees for setting up a new policy and a down payment requirement, so make sure you take that into consideration toward whether cancelling your insurance will still be cost-effective.

Sometimes it makes sense to discontinue your insurance coverage. But before you do, make sure you talk to an insurance professional to help you determine if it’s the right move for you.

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