Changing auto insurance companies? Don’t make this mistake

Chris Kissell

Searching for a new car insurance company can be a smart move. Many experts recommend gathering quotes from several car insurance companies at least once a year.

Doing so can save you up to hundreds of dollars in annual premium costs.

But if you find a new car insurance company, make sure you properly cancel your old policy. For starters, that means making sure your new policy is in place before dropping the old policy. Otherwise, you could end up with a gap in coverage, says Lynne McChristian, Florida representative for the nonprofit Insurance Information Institute.

And if you ended up with a coverage gap, “you could be driving on luck alone,” McChristian says. “Same thing holds true for your home. That would be a costly mistake.”

And the costs of such an error can stretch into the future.

“Letting an insurance policy lapse signals risky behavior to an insurer,” she says, “and it may result in higher insurance rates in the future.”

Other costs to bad cancellations

Failure to cancel a policy properly also can cost you in other ways.

For example, if your original company sends a notice of renewal and you – having chosen a new insurer – simply ignore it, the policy eventually will be canceled on the basis of nonpayment of your premium.

However, it won’t be canceled right away. For example, insurance companies in Illinois can’t cancel for nonpayment without sending the policyholder a letter giving 10 days’ notice, says Janet Patrick, a spokeswoman for the nonprofit Illinois Insurance Association.

Rules vary by state. Jeremy Wilkinson, a spokesman at the National Association of Insurance Commissioners, says states like California also have a 10-day rule. Meanwhile, the number of days notice required to cancel auto coverage in Michigan depends on what’s detailed in the insurer’s policy.

Patrick says that in some cases, the timing of a notice of cancellation for nonpayment may result in your cancellation date falling a week or more into the next renewal period.

“The insurance company can charge a pro-rated premium for the number of days coverage was provided,” Patrick says.

And because insurance is regulated at the state level, failing to properly cancel car insurance may trigger additional financial consequences, depending on where you live.

For example, Michigan state law says policyholders who have their old policies canceled for nonpayment can’t make partial payments to their new insurance company, says Lori Conarton, a spokeswoman for the nonprofit Insurance Institute of Michigan.

“A policyholder could get insurance from another company, but they would have to pay the entire premium prior to securing the policy,” Conarton says.

Paying the full premium up front – rather than in installments – could be a hardship for policyholders on tight budgets.

How to cancel correctly

To avoid such headaches, make sure you properly cancel your old insurance policy. The first step: Secure coverage with a new insurer.

“Don’t stop paying the premium on the old policy until the new policy is in place,” McChristian says.

Once you have new coverage in place, call your insurance company to find out the proper procedure for canceling. Some insurers may require you to fill out company forms used for cancellation. Other insurers may ask for a signed letter requesting that the insurer cancel your coverage, Patrick says.

“Provide a specific cancellation date that coincides with the effective date of the replacement policy,” Patrick says.

Also, include your home address and policy number in the letter, and be sure to sign it.

Remember, once you cancel a policy, you are entitled to a refund of any remaining portion of your premium payment that won’t pay for insurance protection.

Most states have consumer protection laws that spell out how a refund tied to a cancellation should be handled, McChristian says. For example, she says, in some states the remaining premium money must be returned to the consumer within a certain number of days (usually 30).

Looking to avoid unnecessary hassles? McChristian offers a tip for timing the cancellation: “It might work best for the consumer to wait until the policy comes up for renewal before changing insurers.”

If you cancel before the renewal date, the old insurer might charge a penalty, she says. Also, canceling in the middle of a policy term can be a red flag for future insurers. “A history of cancellations may cost you more in premiums,” she says. 

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