What You Need to Know Before Switching Insurance Companies

With the economy as slow as it is right now, we’re all looking for new ways to save money on everything - including auto insurance. We all would love to get the same or even better coverage for a lower price than we are getting right now, but is it really a good idea to switch insurance companies when we are only three months in on a six-month auto policy? The answer is yes – insurance companies can and do charge hundreds more (or less) for identical auto insurance policies, so it is always worth shopping around. The key is to keep the below things in mind before you switch.

Best Time to Cancel

Typically, the best time to shop for insurance is about three to four weeks before your existing policy is about to expire. Depending on your state, a renewal notice will be sent to you approximately a month before your new policy period begins. Keep in mind that almost all auto insurance policies will auto-renew if they do not hear from you before the end of the term.

The good news is that standard auto insurance policies contain a provision giving you 100% right to cancel your policy at any time. In other words, you do not need to wait until renewal time to cancel your policy. All you need to do is to give proper notice to the current insurance company. However, cancellation just before a policy has renewed is ideal since you don't have to worry about recovering the unused portion of your paid premium. But, if you choose to cancel in the middle of a cycle, the company will prorate your latest premium payment up to the cancellation date and return the remainder to you.

Watch Out for Early Cancellation Penalties and Keep in Mind Loyalty Benefits

Unfortunately, some auto insurance carriers may charge a special "short rate" cancellation penalty if you cancel in the middle of a policy term. If they do charge you a penalty, you'll need to do the simple math to see whether the better rate you’ll be getting from the new insurance company will offset the cancellation fee you may have to pay. Keep in mind also that many companies offer loyalty incentives to keep you with them - earned accident forgiveness, renewal discounts, and other loyalty benefits can grow depending on the amount of time you maintain a policy with a given insurance company. Overlooking these incentives may make a new insurance company look more attractive compared to your current insurance company that they actually are.

Make Sure You Explicitly Cancel Your Current Policy

Even if your current policy is set to expire soon, don't just walk away from your old policy without formally canceling it. Most auto insurance policies are "continuous", meaning that your policy will automatically be renewed every six or 12 months unless you explicitly cancel it. If you fail to cancel your policy, your auto insurance company will renew your policy and continue to bill you, and, if you don’t pay, they will eventually cancel the policy for failure to pay. This is not good: they will report you to a credit agency for non-payment, and you will have deal with the hassle of disputing your non-payment to clear up your credit record. Furthermore, they may report you to your state as an uninsured driver – again, a mix up that you want to avoid at all costs.

So be sure to submit your cancellation request in writing, and don’t assume your current coverage has been cancelled until you receive an official policy cancellation notice from your auto insurance company stating the date and time when your coverage will stop. Keep this notice for your records in case there is ever any future mix up.

Get a New Policy Before You Cancel Your Existing Policy

Also, don’t forget to get your new policy before formally cancelling your old one. Why? Almost all states require you to maintain a minimal level of auto insurance at all times. As such, most states require auto insurers to confirm that you have a new policy before cancelling your old policy – this is because more and more states are automating the tracking of drivers’ compliance with their mandatory auto insurance laws. Also, you don’t want any gaps in your auto insurance coverage. Most insurance companies do not look favorably on you not having continuous auto insurance coverage and may charge you more if you haven’t been continuously insured for a long period of time.

Notify Your DMV

Lastly, be sure to ask your new auto insurance carrier (or your old one) whether you need to report your change in insurer to your state’s DMV. Some states require the insurance carriers to automatically notify them and others rely on the driver to report changes in their insurance policy.