Are car insurance cancellation fees legal?

Despite cancellation fees being legal in most cases, car insurance companies will often choose not to charge drivers looking to cancel their policy in order to avoid negative reactions.

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UPDATED: May 26, 2022

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Written By: Laura BerryReviewed By: Joel OhmanUPDATED: May 26, 2022Fact Checked

Here's what you need to know...

  • In most cases, car insurance companies can charge a cancellation fee if you end your policy early
  • Most cancellation fees are small, usually under $100
  • Many insurance companies don’t charge cancellation fees to avoid bad reviews and unsatisfied customers

Nobody gets excited about paying a cancellation fee, but you can’t always avoid them. Sometimes, 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 your auto insurance, especially since many people don’t realize that companies can penalize them. However, insurance companies usually can charge customers for canceling their policies 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.

Are car insurance cancellation fees legal?

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

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

A flat fee is a set amount you’ll pay regardless of when you cancel your 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.

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Are there times when a company can’t charge a cancellation fee? 

Insurance companies 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 canceling it. 

Renewal means extending your policy for another term after your current term expires. However, a cancellation 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.

Can you get a cancellation fee if the company drops you?

While an early cancellation fee 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

Most insurance companies don’t charge cancellation fees since it’s generally not worth the lower customer satisfaction scores and bad reviews.

Instead, you’ll usually get a prorated refund if 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 cancellation policy fee is zero, so you’ll probably get a refund. Many large name companies don’t want any sort of negative feedback, so by not having any sort of cancellation policy fee, State Farm car insurance reviews are going to be more favorable. 

If you’re worried about 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.

Cancellation Fees by Company
CompanyCancellation Fee
State FarmNone
AllstateNone
Progressive$50 only during first term
GEICONone
Travelers$20 to $50 in some states
FarmersNone
Liberty Mutual Yes, in some states
The General10% of the remaining policy in some states
USAANone
American FamilyNone
NationwideNone
Dairyland10% of the remaining policy
Mercury10% of the remaining policy
ErieNone
The HartfordNone
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As you can see, most companies don’t charge a cancellation fee. However, the fee isn’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.

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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 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 do you cancel your car insurance?

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 to cancel your car insurance, 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.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Written by Laura Berry
Former Insurance Agent Laura Berry

Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP® Joel Ohman

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