Short Rate Premium

What Does Short Rate Premium Mean?

A short rate premium is the amount refunded to the policyholder when they cancel a policy before its expiration date. The refund is typically calculated using a short rate table, which takes into account the policy’s inception date, the cancellation date, and the premium paid.

Insuranceopedia Explains Short Rate Premium

When a person cancels a policy, they may assume they will receive the entire premium back or a refund equivalent to the time remaining until the policy expires. However, this is not always the case. Insurance companies often calculate cancellation refunds in a way that discourages policyholders from canceling.

For example, if someone has paid a premium of $1200 for a year-long policy and decides to cancel six months before its expiration, they might expect to receive $600, which is half the amount for half the year of coverage. However, the insurance company will typically charge for the costs associated with setting up the policy. Additionally, the company will likely use a short rate table to apply a penalty percentage based on the time the policy was active or the time remaining. As a result, the refund will likely be less than $600.

Because the short rate penalty is tied to how much premium was paid upfront, knowing how much car insurance typically costs in the first place helps you judge whether the refund you’re being offered is reasonable. If you’re thinking about switching mid-policy, it’s worth comparing quotes from the best car insurance companies to see whether the savings on a new policy outweigh the short rate penalty on the old one.