What Does Short Rate Cancellation Mean?
A short rate cancellation is when the policyholder cancels an insurance policy before the policy expiration date. Short rate cancellations do not entitle policyholders to a refund proportionate to the coverage period left in the policy term.
When a policy is a short rate cancellation, there are administrative costs and penalties charged by the insurance company. These costs are deducted from any unearned premiums and serve as a disincentive to cancelling policies early.
All types of insurance cancellations can be administratively time-consuming for insurance companies, with the short rate being the most common. However, when the insurance company cancels a policy, it is not referred to as a short rate cancellation. This type of cancellation is called a prorated (or pro rata) cancellation.
Prorated cancellations are calculated based on the amount of time left on the policy. This usually happens because of some material change in circumstances or when the insurer doesn't feel comfortable staying on the policy, so no additional fees are charged to the insured party.
Short rate cancellations are calculated using a table that shows the penalty amount over the term. For example, some companies have a 25% minimum, which increased to 100% near the policy's end. The main reason for the tables is that when an insurance company uses an annual term of coverage to calculate premiums, its cost is lower.
In essence, you are charged more if you requested a shorter term when you purchased the policy, which is taken into account for short rate cancellations. At the same time, each insurance company has unique rules and fees regarding cancellation calculations. Some companies do not charge short rate cancellation fees and use only prorated amounts for all cancellations.