Laura Berry is a former State Farm insurance producer and insurance expert.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 19, 2021

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Canceling automobile insurance needs to be treated with a businesslike attitude, just as purchasing the insurance should be. Start comparing car insurance rates now by using our FREE tool above! Remember, as a contract between you and the insurance company involved, it is necessary to follow the appropriate procedure to ensure the transaction is both legal and final.

There are many reasons an individual may wish to cancel car insurance on their vehicles. The most common are:

  • You have found another policy at a lesser price
  • Moving to another state in which the company does not write insurance
  • Selling your car and no longer driving
  • You are unhappy with the service and coverage on your current policy

No matter what your reason for canceling may be, to do it appropriately, you need to consider the following:

  • What portion of your premium will be returned?
  • Will the insurance company levy a penalty?
  • Date of cancellation
  • What notice is required from your current insurance company?

What notice is required to Your Current Insurance Company?

They need to be notified of the date at which you have replaced their policy. In some states and with some insurers, notification of cancellation is not enough. Information about the dates of the replacement policy and a copy of the declaration page of the policy may be necessary.

Automobile insurance does not necessarily end at an anniversary date.

First, call your current insurance company and inform the agent of your intent. They will attempt to talk you out of it, but you can stand firm if you have done the necessary background to choose your new policy. After calling them, follow up with a letter directed to your agent with a copy of the declaration page of the new policy to verify that coverage will be continuous on your vehicle with no gap in dates.

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Date of Cancellation

Read the declaration page of your current policy to determine when the policy will expire. Pay special attention to the date and time of expiration. To avoid a gap in insurance coverage, the replacement policy needs to be dated as of the date of expiration. By the way, the declaration page of your current car insurance policy can give information to you about your insurance coverage. The declaration page is usually the first page in a policy package.

Will the Insurance Company Levy a Penalty?

Depending upon the reasons for cancellation, your current insurance company may require a cancellation penalty. They will, of course, try to talk you out of canceling, but depending on when and how the policy is canceled – it may cost you a penalty according to policy clauses. In addition, the insurance industry has several terms for the ways they process return premiums:

  • Pro-Rate cancellation in which you are not penalized any premium. The return premium is calculated by taking the number of days left in the policy period and divides them by the number of total days of the policy. The fraction developed in this method is multiplied by the written premium to arrive at the full premium. A simplified example of this is: A yearly policy costs $1000 for 365 days of coverage. You cancel the insurance 100 days into the policy. The fraction of 265 (days left)/over 365 (total days) is multiplied by the premium ($1000). Reduce the fraction to 2/3 and multiply it by the premium of $1000. Return premium would be $666.00 when rounded.
  • Short Rate Cancellation is usually applied when the cancellation is at the request of the insured. Factors are applied, levying an insurance premium higher than the amount returned in pro-rata cancellation.
  • Short Rate (90 percent pro-rata) is another method of determining return premium, a little easier than the above short rate process. The pro-rata premium being returned is reduced by ten percent as a penalty.

To avoid difficulty, it is best to arrange to cancel insurance on the policy’s renewal date so the previous premium is fully earned and you have not incurred more premiums.

Obtaining Competing Estimates for Car Insurance

Take the information you obtain from the declaration page of your current policy and use that as a basis for obtaining estimates for insurance. Then, be sure to approach at least three different insurance companies for estimates or quotations. To begin with, ask for the same coverage as is on the policy you are replacing. This will allow you to compare prices reasonably.

Before settling on one insurance company, do a bit of research on the company itself. Insurance, because of the fast-moving market, is particularly vulnerable to fraud. To verify the status of the insurance company, access the following resources:

  • Contact your state’s Department of Insurance to determine licensing information
  • Examine the details of the insurance company’s financial status and method of handling claims by examining the National Council of Insurance Commissioner’s website.
  • Further financial information can be obtained by looking at A. M Best, a financial rating company, to assess insurance entities.

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Possible Concerns in Cancelling Auto Insurance

Some states, such as Nevada, require you, if you drop your liability insurance, you must cancel the automobile’s registration, return the license plates, and re-register the vehicle. This is especially important to know if there is any gap in your insurance coverage. This is not true in all states, but necessary to understand. The state’s insurance department will be able to inform you of this.

Do not forget to follow up a call to your insurance agency or company with a written letter. This may save you difficulty if your insurance is automatically renewed or the message is lost. Remember, again, that insurance policies are a legal contract and should be treated as such. Since insurance is such a common commodity as refrigerators or a new stove, it is easy to regard it. Keep in mind, though, that just as the insurance company has responsibilities to you, you have them to the insurance company. Start comparing car insurance rates now by using our FREE tool below!