Switching Insurance Companies
We are bombarded daily with radio and television ads urging us to switch insurance companies and save big bucks.
Paying a lower premium for identical insurance coverage is a no-brainer. Don’t we all want a little more, or the same, for less…especially in this economy?
While this is entirely possible (although the advertising may be somewhat misleading), it may not always be a good idea to switch insurance companies mid-term.
There is at least one thing to consider when you make the choice to “shop” your premium and switch insurance companies before your current policy ends.
Namely, how your current insurer treats your cancellation with regard to returning the unearned premium, which is the technical word for the pre-paid money they haven’t earned from you for providing coverage you’ve yet to receive.
Let’s look at an example of where switching mid-term, or while you’re currently insured under another policy, might not be in your best interest.
Imagine you pay $1,200 for a one-year policy with Company A. That breaks down to $100 per month for coverage. You shop your premium and find you can get identical coverage for only $1,000, ultimately saving $200 over the life of your current policy.
But before deciding to switch, you will need to determine how Company A calculates your refund. Some companies will give you a short-rate refund.
Basically, they won’t give you a refund based on the exact number of days you were actually insured. This is a cancellation service charge.
If you had six months of coverage, you would have six months of unearned premium and would expect a $600 refund (half of the $1,200 assuming you paid in full upfront).
The short rate refund may include a cancellation fee of $150 dollars. Therefore, you would only receive $450 back at the end of the process.
Furthermore, your policy may have included a “fully earned” policy fee of $50. Fully earned is the technical term for “no refund for any reason.” They consider it earned for issuing the policy. Either way, you are now down to a $400 refund.
With your refund down to $400, the policy Company B is pitching for $200 less would result in zero savings.
In this instance, it’d be better to wait for your current policy to end and switch at time of renewal.
It’s important to note that if your insurer decides to cancel your policy at any time, you are due the pro-rated refund, which is directly proportional to the time you were covered by them.
However, any “fully earned” fees will still not be refunded. You should be notified of fully earned fees upfront when you purchase any insurance policy.
It is often argued that insurance today has become more or less a commodity. This means that, similar to barrels of oil or bars of gold, insurance is standardized to a point where it doesn’t matter who you buy from, the only concern is the price, as you end up with the same product.
This is true to a degree, but you will want to make sure you are with a reputable, financially stable company that provides good customer service.
Your independent agent or insurer should be more than willing to disclose the financial ratings of their company or the companies the represent before issuing your policy.
They should also be aware of the customer service reputations as well. Turn around and walk out the door if they don’t readily offer this information to you.