How to cancel your car insurance policy

Car insurance is required by law if you want to operate a vehicle in all Canadian jurisdictions and must be purchased by every driver. Even thought you it is required, there are times where it may be necessary to cancel your car insurance. For example, you may want to change providers to find a better deal, you no longer own a car and have no need for a policy, or you are moving to a new province or country. Right now, as we experience significant inflation in a post-pandemic world, you might also be thinking of cancelling your car insurance because you’re simply cannot afford to keep it. 

Regardless of the reason, if you want to cancel a car insurance policy make sure to review all the options with your auto insurance provider or broker. There are different financial implications that come along with cancelling a policy depending on the provider you deal with or the current status of your application. Let’s look at the differences between cancelling a policy at renewal vs mid-term. 

Cancelling your car insurance at renewal

During your annual renewal period is the best time to consider a policy change. It’s a good opportunity to seek out other auto insurance quotes or even discuss new options with your current provider. It’s also a good time to change or cancel policies while avoiding potential charges or associated cancellation fees (more on that below).

Mid-policy car insurance cancellation

Mid-policy cancellation can cost you in fees and other charges. Insurance providers anticipate a full year of payments when providing car insurance to you and may charge for your change of heart. Fees or cancellation penalties can range from as low as $25.00 to as high as some percentage of your overall premium. It’s always important to check the fine print of your policy before you make any final decisions.

The types of refund depends on when you cancel. 

Cancelling your car insurance should result in a refund, but your refund amount can vary. A typical car insurance company will either offer:

• A pro-rated cancellation, which gives you back the full amount of the unused premium;
• Or, a short-rate cancellation, which takes a certain amount out of the refund as a penalty for early cancellation. 

How to avoid a gap in coverage when cancelling

Always be sure to mind the gap with car insurance cancellation. During the cancellation process, there is a possibility of gaps that may occur in your auto insurance coverage. A gap in your coverage history can affect your overall rating and increase your premiums. If you are cancelling coverage with one provider, but expect to seek coverage elsewhere, be sure to bridge those gaps. You can either add yourself to another vehicle, if you have one, or ensure there is no lag time between policies by aligning your policy cancellation and start dates. You don’t want to be without coverage if you plan on driving. 

Alternatives to cancelling your insurance

It’s important to consider alternatives to cancelling because the fees and costs can be a detrimental factor. Some drivers may simply consider reducing their coverage amount or pausing their car insurance policy and taking their vehicle off the road for a set period of time to lessen the economic burden.

For some people living with the harsh realities of our current economic climate, it might make more sense to reduce their coverage to get a cheaper car insurance rate. Think about increasing your deductible and removing non-standard components of your auto policy like comprehensive insurance and collision insurance. You might also consider dropping your third-party liability insurance down to the minimum coverage requirement. Quebec car insurance only requires $50,000 in liability, but everywhere else in Canada it’s minimum $200,000, though this is still cheaper than the $1 million of coverage you likely have now.

The pandemic altered a lot of people's driving behaviours and eliminated a number of daily commutes, as businesses have embraced a work from home culture. Take a look at your policy and see what your listed annual kilometres driven is set to and if you have a one-way commute set on your policy, if your driving behaviour has been altered reducing or removing a commute will help you save.

Finally, if you have 2 cars, consider only driving one and dropping the coverage to only comprehensive only while you store the other. For even bigger savings, if you only need 1 vehicle consider selling the other car. Not only will you save on the car insurance payments, but you will make money on the sale.

It's important to be aware of the cons associated with reducing your insurance coverage, as you are now assuming more of the risk by having less coverage. By dropping collision, increasing deductibles, and reducing third-party liability means you're signing up for more of the financial risk associated with claims and accidents. Ask yourself if you’re ready for the financial repercussions if you are in a collision. Without comprehensive, and a tree falls on your otherwise parked car, or a vandal smashes your window, you’ll be paying out of pocket for the repair.

Can you cancel insurance on a financed car? 

While officially the government will let you, your auto loan provider won’t allow it. Remember that depreciation accounts for a massive amount of a car’s worth. That means, within a year, your car is likely worth less than you owe on it. If you’re in a collision, car insurance will pay the actual cash value, which won’t cover the full cost of the loaned car that you now have to pay back because it’s a write off. You’re left with thousands owing on your auto loan, and no replacement car. This is when you need gap insurance and unless you bought it when you leased the car, you’re out of luck. 

The bottom line

What you should really try to avoid, if costs become prohibitive, is not paying your bills and forcing your insurance company to cancel you. A cancellation for non-payment will only cause you problems later if you are in need of insurance in the future. Finding an insurer after a forced cancellation due to unpaid fees will be one of the biggest challenges, as you are now deemed a high-risk driver and the rate you pay will be much higher than before. 

If you are unsure about your policy's fine print or other legalese, and you have a broker, ask for their help - they will be happy to answer all your questions about policy savings or cancelation. At the end of the day, make sure you understand the implications associated with cancelling or reducing your policy premiums. Make a measured and smart financial decision after you've considered all your options.

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