Short Rate Cancellation

Definition - What does Short Rate Cancellation mean?

A short rate cancellation is when a policyholder cancels an insurance policy before the expiration date and they are not entitled to receive a refund proportionate to the period of coverage left in the policy term. It serves as a disincentive to canceling policies early.

Insuranceopedia explains Short Rate Cancellation

Short rate cancellations are an alternative to other forms of cancellation, such as pro rata cancellations. In pro rata cancellations, the policyholder is entitled to a refund proportional to the amount of coverage left in the term. With short rate cancellations, there is a penalty, which may be a percentage increase of the pro rata rate. Thus, in this case, the policyholder ends up paying more for the coverage they enjoyed up to that point than if they had kept the policy.

For example, a policyholder pays $1,000 for six months of coverage but cancels the policy after three months. Rather than receiving $500 as a refund for the remaining three months of coverage they opted for, in a short rate cancellation, the amount would be less as stipulated in the contract.

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