What is Short Rate Cancellation?
Short rate cancellation occurs when a policyholder chooses to cancel their insurance policy before its expiration date. Unlike a pro-rata cancellation, where the policyholder receives a refund for the unused portion of the premium without any penalty, a short rate cancellation deducts a penalty fee from the refund. This penalty is typically calculated based on a short rate table that insurers use to determine the exact amount.
In personal and business insurance, such as homeowners or car insurance, short rate cancellation can be costly for the insured. If you decide to switch insurance providers or cancel your policy early for any reason, you may face a short rate cancellation penalty, resulting in a reduced refund of the unused premium.
For example, if you paid for a full year’s coverage but decided to cancel after six months, the insurer would calculate the unused portion of your premium. However, with a short rate cancellation, they would keep an additional percentage of that premium as a penalty.
It’s important to review the terms of your policy carefully before opting for early cancellation to understand how much of your premium you will get back and how much will be forfeited as a penalty.