Pro rata cancellation

Pro rata cancellation is the most common way refunds are calculated when a policy ends before its expiration date. The insurer keeps the premium for the days you were covered, called the earned premium, and returns the rest, the unearned premium, without deducting a penalty.

The formula: refund = premium paid × (days remaining ÷ days in the policy period). Example: you pay $1,200 for a 12-month policy and cancel after exactly three months. The insurer has earned $300, so the refund is $900 (hypothetical figures). If you pay monthly, there may be little or nothing to refund, since you have paid only for time already used.

Insurers generally refund pro rata when they cancel a policy themselves, and many also do so when you cancel. The alternative is short-rate cancellation, in which the insurer keeps an extra charge when you end the policy mid-term. Which method applies depends on the policy and state rules, and some policies also have a minimum earned premium or a cancellation fee. Before cancelling to switch insurers, ask which method your policy uses and make sure the new coverage starts first. See how to cancel car insurance the right way and policy cancellation.