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Canceling your car insurance is a straightforward, reasonably painless process.

It usually requires calling your car insurance company. However, there are some pitfalls to watch for when canceling a policy.

There are many reasons why you might want to cancel your insurance:

  • You find a cheaper policy with the same or even better coverage.
  • You move to a new state and your insurer doesn’t provide coverage there.
  • You sell your car.
  • You decide to stop driving altogether and walk and take public transportation.

Those are all valid reasons to cancel. However, there are other times when dropping your insurance leaves you exposed to lawsuits, hefty repair bills and police stops.

Let’s take a look at when you can cancel your car insurance, how to cancel and when you shouldn’t cancel your coverage.

When can you cancel your auto insurance?

You don’t have to wait until renewal time to cancel your auto insurance. You can cancel at any time of the year. The insurer should refund you any premiums that you overpaid minus any cancellation fees.

Your insurer may have a notification period for when you must tell the company about cancellation. Company notification policies can require drivers to notify the insurer 30 days before you want to cancel. Check your policy or contact your insurer to find out the company’s policy.

How to cancel your car insurance

Car insurance company cancellation policies vary. Some require you to call them; others might let you cancel via an app. Still, others demand a cancellation letter with your signature. That letter will include the date of when you want your coverage to end.

A good place to start is to check your policy or call the company or look on the insurer’s app for specifics.

When you cancel, your insurer may charge you a cancellation fee if it’s in the middle of your policy year. These fees are usually $50 or a portion of the remaining premium for the year, such as 10%. So, if you have $400 left to pay on your policy, you may have to pay $40 when you cancel.

You’ll want to make sure that there’s overlap between the two policies if you’re changing car insurance companies. If you’re canceling because you’re selling a car, you’ll want coverage until the new owner takes possession of the vehicle’s title.

If you drop coverage when selling your car, you may still need another policy if you plan to borrow a friend’s car or rent vehicles. In that case, you might require non-owner car insurance, which provides liability insurance that protects you if you injure another person or damage another vehicle or property. The average cost of non-owner car insurance is $474, but rates vary based on your location, driving record and the coverage amount.

If you’re selling a car, make sure you have coverage through the final day that you're selling the car. So, if the new owner plans to take possession on July 1, keep coverage until July 2 just in case.

Also, see if your state department of motor vehicles has a release of liability form. This form, see here an example from California’s DMV, lets you notify the DMV that you have sold a vehicle and ownership has changed.  This allows liability resulting from the vehicle's operation to be placed on the purchaser instead of you. It can help in case the party buying the car doesn’t immediately place registration and insurance in their name.

How to cancel auto insurance when you’re switching companies

Canceling your auto policy based on changing insurers is common. You may have found an insurer with cheaper rates or maybe you moved to another state.

Shopping for car insurance annually or at least every three years is a wise financial move. You may be able to get the same coverage or even better for less money.

No matter the reason, switching car insurance companies requires you to make sure you’re never without coverage. So, you should make sure that the two policies overlap by at least one day.

For instance, if the new policy begins on May 1, you should choose May 2 as the end date for the old policy. At that point, you’ll make sure you’re never uninsured.

You might think that driving without insurance for a day or two won’t affect you. However, police could pull you over or you might get into an accident and have no coverage. And some states will penalize you if it finds there is even a one-day gap in insurance.

“Drivers should make sure they have a day or two overlap. That one or two days won’t cost you much and you’ll still be protected,” said Penny Gusner, senior consumer analyst at insurance.com.

When you shouldn’t cancel car insurance

You're looking for ways to cut costs. You decided that canceling your insurance can save hundreds or even thousands over the year. That's not a wise move.

If you still have a vehicle and cancel your insurance, insurers may wonder why you stopped coverage. That lapse in coverage is a red flag for car insurers. Future insurers may ask why you dropped insurance and you could pay higher rates. 

Here’s when you shouldn’t end your car insurance:

  • You stop paying your insurance and let your insurer drop you. You’ll still be on the hook for what you owe. Plus, insurers usually automatically continue your policy into a grace period at renewal time. This is to make sure you’re still covered if your payment is late or gets lost. These grace periods are often 20 days. You’ll still be on the hook for those 20 days of coverage if you don’t cancel your policy. The insurer will bill you for that period and cancel your policy for non-payment.
  • You drop car insurance altogether as a cost-saving measure.  Not only does dropping coverage put you at risk. Your state likely requires it, too. New Hampshire, Tennessee and Virginia don't demand you buy a car insurance policy, but you'll get whacked with all the costs if you get into an accident, including hospital bills. Also, these states require financial responsibility or you can be penalized just like drivers in states that require car insurance. The easiest way to show that you’ll take responsibility is by having a car insurance policy.
  • You don't drive often. You might just drive once a week and limit your mileage. However, you'll still need insurance. You never know when you might need it. On the plus side, insurers usually give discounts to motorists who limit their driving. The average low-mileage discount is 2%.
  • You’re not going to drive your car for a while. Even if you’re headed out of the country, you’ll want to keep insurance. If you put your vehicle in storage, it could be damaged by a fire, flooding or falling debris. One option is to drop collision coverage and keep comprehensive coverage while you’re away. Comprehensive covers you for damage not caused in a collision. The average cost of comprehensive coverage is $192.

Dropping coverage doesn’t just leave you on the hook for damages. A lapse in coverage will also have future insurers wonder what happened during those months. Insurers consider a lapse in coverage as a red flag and a signal for a risky person. That will lead to higher rates for you.

“Everyone wants to save money on their car insurance. Shopping for car insurance every year or every few years is a wise choice. That said, you shouldn’t look to save money by completely dropping your coverage. Driving without insurance puts you, your family and your finances in danger,” Gusner said.