Do You Get a Refund if You Cancel Homeowners Insurance?

Homeowners insurance provides financial protection for your dwelling and personal belongings against various perils, along with liability coverage. Policyholders sometimes find themselves needing to cancel their coverage, perhaps due to selling their home, refinancing, or finding a different insurance provider. A common question is whether a refund is issued upon cancellation. Understanding how these refunds are handled can assist in financial planning.

Understanding Homeowners Insurance Refunds

When you cancel a homeowners insurance policy, receiving a refund for prepaid premiums is possible. The amount and method of this refund depend on how the insurance company calculates the “unearned premium,” the portion of your payment covering the period after cancellation. Insurance companies typically use one of two primary methods for calculating these refunds: prorated or short-rate.

A prorated refund is the most straightforward. This method calculates your refund based on the exact unused portion of your premium, with no penalty or deductions. For example, if you paid for a full year of coverage and cancel halfway through, you would receive a refund for the remaining six months. This approach is commonly applied when the insurance company initiates the cancellation, or in certain situations where the policyholder cancels due to circumstances like the sale of the insured property.

Conversely, a short-rate cancellation involves a penalty deducted from your refund. This method is typically applied when the policyholder cancels their policy mid-term without a qualifying reason. The penalty compensates the insurer for administrative costs and can range from a flat fee, such as $25, to a percentage of the unused premium, or 2% to 8% of the annual premium. The specific calculation and penalty amount are usually detailed within your policy documents.

Beyond these two calculation methods, a “minimum earned premium” can also influence the refund amount. This is a portion of the premium the insurance company retains to cover its initial costs, such as underwriting and policy issuance, regardless of how early the policy is canceled. Even if you cancel shortly after the policy begins, the insurer will keep at least this minimum amount, which could be a fixed sum or a percentage of the total premium.

Preparing for Policy Cancellation

Before initiating the cancellation of your existing homeowners insurance, first secure new coverage to prevent a lapse. A gap in coverage leaves your property unprotected and significant financial risk. This step is particularly important if you have a mortgage, as lenders typically require continuous homeowners insurance coverage on the property.

If a mortgage lender is involved, they will be notified of any policy cancellation and may implement force-placed insurance if new coverage is not promptly secured. Force-placed insurance is more expensive and offers less comprehensive coverage than a policy you would purchase independently. It is advisable to have the new policy’s effective date align with or slightly precede the cancellation date of your old policy.

Gathering all relevant policy information is important. This includes your current policy number, the effective dates of coverage, and details about how your premiums are paid. Having this information readily available will streamline the cancellation process and any subsequent refund discussions. Additionally, knowing your insurer’s contact information and their preferred methods for handling cancellations will be beneficial.

The Cancellation Process and Refund Receipt

After securing new homeowners insurance and gathering information, you can cancel your current policy. Common notification methods include a phone call, written notice, or online portal request. While a phone call can initiate the process, it is often recommended to follow up with a written confirmation to create a clear record of your request, including the desired cancellation date.

When contacting your insurer, state your intent to cancel and specify the termination date. This date should ideally coincide with or be just after the start date of your new policy to ensure continuous coverage. After submitting your cancellation request, it is important to obtain a confirmation from the insurer that your policy has been canceled. This confirmation can be a letter or email, serving as proof of termination.

Regarding the refund, the typical timeframe for receiving funds after cancellation can vary, generally ranging from 7 to 30 days, or a few weeks. Refunds are commonly issued through various methods, including a physical check mailed to you, a direct deposit to your bank account, or a credit applied to your mortgage escrow account if your premiums were paid that way. If your insurance was paid via an escrow account, the refund typically goes to you, and you should consider returning it to the escrow account to prevent any future shortages. If the refund is delayed or appears incorrect, contacting your former insurer directly to inquire about the status and reconcile any discrepancies is advisable.