For some reason, you have decided that the relationship with your insurance company has come to an end. Whether you’re replacing your coverage with another insurance company or not, you’ll 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 you get, depends on several factors.
Determine the unearned premium
Although you pay your insurance premiums monthly, periodically or annually, the cost of insurance is calculated per day. Therefore, when the policy is canceled, the insurer can determine exactly the amount to be charged until the date of cancellation. If you have paid more money than the company earned while maintaining the policy in effect until the cancellation date, the excess is called an unearned premium. This is what you expect to recover in the form of a refund.
The laws governing the insurance industry are developed and applied by all states, so 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 the unearned premium when you cancel your policy, since insurers are usually asked to do this. However, there are factors that may decrease 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 in your application, and must recalculate the amount of money it should have collected. If you refuse to cooperate in a premium audit, or if the amount determined by the audit remains the subject of controversy, the insurance company cannot be legally obligated to reimburse the unearned premium. California, for example, allows this exception.
Some states allow insurers to issue an early cancellation fee, that is, to retain an administrative fee over the amount of the unearned premium. Although insurers can set their own early cancellation fee rules, this amount is usually 10 percent of the unearned premium. In addition, some brokerage fees or commissions may be “fully charged” at the beginning of the policy, which means that they are not subject to refund. If the unearned premium is equal to or less than fully charged commissions or the amount of the early cancellation fee, you may not receive a refund, and you may end up owing money to the insurer.