Is there a cancellation fee for car insurance?

Are you looking to cancel your car insurance policy early and want to know if you'll face a cancellation fee? Car insurance policies typically last 12 months, but that doesn’t mean you can’t cancel your insurance coverage before it expires—but yes, you'll likely face a fee. Here's what you need to know.

Car insurance cancellation fees explained

Car insurance policies in Canada generally last for 12 months, and if you decide to cancel your insurance policy before the end of your one-year contract, your insurance company will likely apply a "short rate" cancellation. This means they’ll charge you a penalty for ending the policy early. These fees are outlined in your policy’s terms and conditions, so it’s important to review them carefully to know what to expect.

Most insurance companies charge a "short-rate cancellation penalty" based on a percentage of your annual premium, which can range from 2% to 15%. The earlier you cancel in the policy term, the higher the percentage tends to be. For example, if your annual premium is $1,200, you might pay anywhere from $24 to $180 to cancel early. The exact amount depends on the company and how far along you are in the policy period.

If you need to cancel before the renewal date, it’s always a good idea to reach out to your current insurance company first. They can explain the specific fees and any additional costs involved. This ensures you’re fully informed before making your decision.

Can I avoid a cancellation fee?

If you want to avoid paying short-rate cancellation fees, the best option is to cancel your policy on its expiry or renewal date. This allows you to switch insurance providers or make changes without any penalties.

Basically, if you cancel your car insurance policy on the renewal date, there’s no charge—easy and straightforward. But if you cancel before your renewal date, you’ll likely have to pay an unavoidable cancellation fee.

How do insurance policy cancellations work?

When it comes to cancelling an insurance policy, there are two types of cancellations: “short rate” and “pro rata.” Insurance policies typically run for 12 months, referred to as the “policy period.” When you purchase a policy, you’re agreeing to a year-long contract—paying your premiums in exchange for continuous coverage. Here's what you need to know:

Short-rate cancellation

If you cancel your policy early, it’s considered a short-rate cancellation, which includes a penalty. With short-rate cancellation, the insurance company charges a fee that’s calculated as a percentage of your total annual premium. This fee is higher than what you’d pay for the unused days.

For example, on a $1,200 policy cancelled after 30 days, a 10% short-rate penalty could apply, and you’d owe an additional 17-20% of the total premium for your “time on risk,” based on the company’s short-rate cancellation table. This means your refund will be reduced by both the penalty and the amount owed for the time you were insured.

Pro-rata cancellation

On the other hand, a pro-rata cancellation doesn’t involve a penalty. Instead, you only pay for the time your policy was active. Pro-rata cancellations are usually initiated by the insurance company, not you, the policyholder. This might happen if the insurer stops operating in your area, discontinues a product, finds you ineligible for the policy, or cancels for reasons like non-payment or a material change in risk.

In pro-rata cancellations, the insurer cancels your policy and refunds any unused premium. If you paid the full premium upfront, you’d typically receive a refund for the unused portion, with no penalty.

Can I get a refund for my cancelled insurance policy?

Whether or not you’ll get a cancellation refund depends on a few factors. If you paid for your policy annually—meaning you paid the full amount upfront—you might get a prorated refund for the unused portion. But if you have monthly payments, you probably won’t see a refund. Plus, cancellation and administrative fees can eat into any refund you might be entitled to. Here's an example if you paid for the full 12 months upfront:

Let’s say your annual car insurance premium is $1,200 (or $100 per month) and you decide to cancel your policy six months into the term. Instead of simply refunding the unused portion of $600, the insurance company applies a short-rate cancellation penalty of 10% of your annual premium. The unused premium for the remaining six months would be $600, and the short-rate penalty is 10% of the annual premium, or $120.

• $600 (unused premium)− $120 (short-rate penalty) = $480

So, instead of getting a full $600 refund for the unused portion, you’d only receive $480 due to the short-rate penalty. This penalty compensates the insurer for administrative costs and the inconvenience of early cancellation. The exact percentage for the penalty varies by insurance company and policy, so it’s always a good idea to review your policy terms or ask your insurer for specifics.

Also, keep in mind that most add-ons to your policy aren’t refundable, and if you bought extras from another provider, you’ll need to cancel those separately. Also, if your insurance company cancels your policy or you’ve already made a claim on it, you likely won’t get a refund.

Even if you’re entitled to a refund, don’t expect the money to come back quickly. Insurance companies usually aren’t required to issue refunds by a specific deadline. Contracts often mention a refund will be provided “within a reasonable timeframe,” which can vary widely. So, be prepared for it to take some time.

To avoid these hassles, it’s usually best to wait until your policy is up for renewal to make any changes. That way, you can switch or cancel without worrying about fees, refunds, or delays. It’s all about timing to make the process smoother and save you from unnecessary headaches.

How to cancel car insurance early

From moving provinces to selling your vehicle, there are several reasons why drivers might want to cancel their car insurance policies early. Should you decide that cancelling your car insurance policy is in your best interests, BrokerLink has put together a guide to doing just that. Check out our step-by-step guide to cancelling auto insurance early in Canada:

Purchase a new policy before cancelling your existing policy

Auto insurance is mandatory in Canada. So if you are a driver, you never want to be without it. Driving without insurance can lead to fines worth thousands, if not tens of thousands, of dollars, licence suspensions, and even jail time. Therefore, if you plan on driving after cancelling your existing policy, make sure you've already purchased a new one that is valid from the date your old coverage ends. A lapse in coverage can have serious consequences.

Speak with an insurance broker

Before cancelling your existing policy with your insurance company, contact your insurance advisor. They can walk you through the pros and cons of cancelling your policy and offer unbiased advice. They can also help you find a new auto policy that suits your specific needs and budget.

Contact your insurance company

To cancel your existing insurance policy, you will need to get in touch with your insurance company if you don’t have a broker. Before submitting your cancellation request, ask your provider for a refresher on the cancellation terms, including any applicable fees. Please note that some providers may require 30 days’ notice for policy cancellations.

Sign and send a cancellation letter (if applicable)

Some auto insurance companies may require you to sign and send a formal letter requesting your coverage to end (this may be digital or by mail). The cancellation letter will likely include your policy number, name, and the date you want your policy to end.

Wait to receive notice from your auto insurer

Once the cancellation request has been made, your insurance company will likely send a notice confirming that your policy has officially been cancelled.

Contact BrokerLink to get your next insurance policy

To learn more about finding a new policy or for help getting car insurance after a cancelled policy, contact BrokerLink today. Our insurance advisors are experts at finding great car insurance policies at low rates. You can count on us to find a policy that meets your lifestyle and budget. Simply give us a call and then sit back and relax while we compare quotes and unlock discounts on your behalf.

We can be reached by phone, email, or in person at any one of our locations in Canada. You can also take advantage of our online quote tool and request a free insurance quote today. All BrokerLink quotes are accurate, competitive, and 100% obligation-free. Plus, they take just minutes to obtain!

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FAQs: Car insurance cancellation fees

Can I make changes to my car insurance policy?

Yes, you can make changes to your car insurance policy, but it might require you to open a new policy. As such, you could face cancellation fees or penalties for ending your current policy early. Depending on the terms of your policy, it might make more financial sense to wait until your current term ends.

If you have any questions, contact one of our local branches.