Are car insurance cancellation fees legal?

Nobody gets excited about paying a cancellation fee for car insurance, but you can’t always avoid them. Sometimes, there is a cancellation fee for car insurance and you’re stuck paying them no matter how hard you fight. However, there are many reasons why a person might be in this situation, and so they need to know how to cancel their car insurance policy and what it will cost. 

It can be painful to pay a fee after canceling a car insurance policy, especially since many people don’t realize that companies can penalize them. However, insurance companies usually can charge customers for cancelling auto insurance early.

If an auto insurance company charged you a cancellation fee, read on to learn if the bill might be a mistake. Then, find out which companies don’t charge cancellation fees to avoid the problem in the future. (For more information, read our “How do you write a car insurance cancellation letter?“).

Are cancellation fees legal?

In most cases, a fee for canceling your car insurance is legal. However, most auto insurance companies don’t charge you for cancelling your insurance policy early.

If you receive a car insurance cancellation fee, it will probably be less than $100. Insurance companies apply two primary types of cancellation fees to their car insurance policies: a flat and short fee.

A flat fee is a set amount you’ll pay regardless of when you cancel your car insurance. On the other hand, a short fee is calculated based on how much remains on your policy when you cancel.

You can usually avoid a cancellation fee by waiting to cancel your plan until it’s about to expire. Additionally, you can wait until the policy ends to avoid a fee altogether. If you decide to wait, you’ll need to notify your company of your intention not to renew.

Are there times when car insurance companies can’t charge a cancellation fee? 

Car insurance can’t charge a cancellation fee if you decide not to renew your policy. However, choosing not to renew a policy is not the same as cancelling car insurance early.

Renewal means extending your policy for another term after your current term expires. However, a cancellation of a car insurance policy means you end your policy before it expires.

Like you, insurance companies must follow the rules of your contract, and there are no policies that state you must renew when the policy ends.

Do I have to pay a cancellation fee for car insurance if the company drops me?

While an early cancellation of car insurance is easy to understand, what about when you lose your insurance involuntarily? What do you do if your car insurance is canceled?

The two most common ways people lose their coverage are by forgetting to make payments or becoming high-risk drivers.

Most insurance companies offer a grace period where you won’t face the consequences of paying late. However, you’ll usually get a notification of non-payment. In addition, insurance companies typically provide a grace period before canceling your coverage.

If your coverage lapses from non-payment, you may be able to reinstate coverage after you make a payment and pay any fees. However, you’ll also have to sign a form saying you won’t file any claims when your coverage lapses.

You can avoid the risk of forgetting a payment by setting up auto-pay. Setting up automatic payments typically comes with the additional perk of a small discount on your policy. 

If you can’t make your payment, contact a representative. They might be able to set up a payment plan to keep your insurance active.

Losing your insurance after a traffic incident is much more serious. Typically, insurance companies won’t drop you unless you’ve been in multiple accidents or arrested for a DUI. However, having your license suspended or revoked can also lead to no insurance.

It’s much harder to find insurance after being dropped for severe traffic violations, and your rates will be much higher no matter where you go.

Your insurance company can also cancel coverage if you fail to register your vehicle or commit fraud by lying or filing a fraudulent claim.

Insurance companies can’t charge you when dropping your coverage but usually skip a refund. Most policies state that you forfeit your prorated refund if the company cancels you for non-payment or traffic incidents.

Insurance Companies That Don’t Have Cancellation Fees

You don’t have to pay to cancel car insurance with most insurance companies since it’s generally not worth the lower customer satisfaction scores and bad reviews.

Instead, you’ll get a prorated refund if you cancel insurance (you’re eligible). A prorated refund returns money for the time you paid for insurance but didn’t have coverage. For example, the State Farm car insurance cancellation policy fee is zero, so you’ll probably get a refund from State Farm for cancellation. Many large name companies don’t want any sort of negative feedback, so by not having any sort of insurance cancellation policy fee, State Farm car insurance reviews are going to be more favorable. 

If you’re wondering about dropping your car insurance without a cancellation fee, check with your company before canceling. You can also check below to see how some of the largest insurance companies treat cancellations.

Car Insurance Coverage Cancellation Fees by Provider

 

As you can see, most companies don’t charge a cancellation fee. However, the car insurance cancellation charges aren’t too steep for those who do.

Another vital aspect is that companies charge cancellation fees depending on the insured’s state.

For example, The General cancellation fee is 10% of your remaining policy, but only in certain states. If you’re a customer of such a company, check with a representative before you cancel to find out if you’ll owe a fee.

When should you cancel your car insurance?       

For the most part, you’re free to cancel your insurance whenever you see fit. However, knowing when to cancel and not is vital to keeping your car protected and your rates low.

Common reasons to cancel your auto insurance include:

• Ending coverage you no longer need. You don’t have to cancel your entire policy — you can cancel the parts you no longer need and keep the rest of your coverage.
• Lower rates. You can sometimes find cheaper rates by shopping around. When you find a better rate, it might be time to switch.
• Selling a car. You don’t need an insurance policy for a vehicle you no longer own. After selling a vehicle, you’ll need to cancel the policy.
• Unsatisfactory experiences. Sometimes a company doesn’t meet expectations, from lousy customer service to slow claims responses. If you’re not happy with your service, you shouldn’t feel guilty about moving on.

Although you’re free to cancel your car insurance, you should ensure it’s the right time. For example, if you plan to drive your car, you need continuous coverage — even a tiny coverage lapse can spike your insurance rates.

Additionally, you should never drive your car without insurance, especially if you live in a state requiring coverage. Canceling your insurance without another policy can land you in legal trouble if caught without proof of coverage.

According to the Insurance Information Institute, driving without insurance can lead to fines, driver’s license suspension, and possible jail time.

How to cancel an insurance policy?

If you no longer need coverage or have a new plan lined up, the quickest way to cancel your policy is to call your insurance company.

When you’re ready, you can cancel your car insurance policy, but ensure you complete the following steps.

First, confirm your cancellation date, as some companies require advanced notice before your plan ends. Then, if necessary, pick a cancellation date after your new policy begins.

Next, ask for a confirmation of the cancellation for your records. Request an email or letter with your cancellation information.

Finally, ask if you’re eligible for a refund for any payment you didn’t use.

If calling your insurance company is impossible or unappealing, there are several other ways to cancel your insurance. 

Ways to cancel insurance include:

• Mail or fax a cancellation request. You can send a signed letter to your company saying you want to cancel your insurance.
• Email an agent or representative. Most insurance companies accept correspondence through email. You probably can’t cancel your policy through email only, but you’ll at least be able to start the process.
• Meet in person. If you’re more of a face-to-face person, you can always stop by your local insurance office to meet with a representative.
• Ask for help from your new insurance. Your new insurance company can usually help you cancel your old policy. You’ll need to provide the previous policy number, the cancellation date, and your signature.

Whether you cancel by mail, fax, or email, you need to know how to write a car insurance cancellation letter. Include your name, policy number, and cancellation date.

Once you’ve spoken to someone about ending your insurance, your coverage will stop immediately. Have a new insurance plan set up before canceling your old policy, so you don’t spend any time uninsured.

Avoid Cancellation Fees With the Right Insurance

Nobody wants to pay a cancellation fee, but sometimes you can’t avoid them. However, there are plenty of ways to avoid falling victim to cancellation fees in the future, including waiting until your policy expires.

Although it might be tempting, you shouldn’t cancel your policy without notifying your insurer. You might face extra charges that you otherwise wouldn’t have if you gave your insurance company proper notification.

Many people also pay for their policies automatically. So if you don’t notify the company you no longer need coverage, it could keep drawing money from your bank.

You can also shop with companies that don’t charge for ending your policy early. For example, there are no Geico, Allstate, or State Farm cancellation fees, so these companies are a great place to start.

Although cancellation fees are legal in most cases, finding a company that won’t charge you for prematurely ending your policy is simple. If you’re ready to find insurance, compare quotes with companies with no cancellation fees to find the best price and product.

Case Studies: Exploring Insurance Cancellation Fees

Case Study 1: No Cancellation Fee

Jennifer decides to switch car insurance providers as she found a better deal elsewhere. She contacts her current insurance company to cancel her policy and is relieved to learn that they do not charge a cancellation fee. This allows her to seamlessly transition to her new insurance without any additional costs.

Case Study 2: Prorated Refund

Mark’s circumstances change, and he needs to cancel his car insurance policy before it expires. He contacts his insurance company and is informed that they do charge a cancellation fee, but it is calculated based on the remaining time left on his policy. Mark decides to proceed with the cancellation and receives a prorated refund for the unused portion of his premium.

Case Study 3: Policy Non-Renewal

Sarah’s car insurance policy is up for renewal, but she decides not to continue with the same insurance company. Instead of canceling her policy, she chooses not to renew it. As a result, she does not incur any cancellation fees and is free to seek coverage from a different insurance provider without any penalties.

Case Study 4: Penalty for Late Payment

David forgets to make his car insurance payment, resulting in a lapse in coverage. His insurance company sends him a notice and provides a grace period to make the payment. Unfortunately, David fails to pay within the grace period, and his coverage is canceled. While he does not face a cancellation fee, he forfeits any prorated refund and must find alternative coverage promptly to avoid driving uninsured.