function calculateRefund() {
var premium = parseFloat(document.getElementById('premiumAmount').value);
var start = new Date(document.getElementById('policyStart').value);
var end = new Date(document.getElementById('policyEnd').value);
var cancel = new Date(document.getElementById('cancelDate').value);
var penaltyPercent = parseFloat(document.getElementById('shortRatePenalty').value) / 100;
if (!premium || isNaN(start.getTime()) || isNaN(end.getTime()) || isNaN(cancel.getTime())) {
alert("Please fill in all fields with valid data.");
return;
}
if (cancel end) {
alert("Cancellation date cannot be after the expiration date.");
return;
}
var totalMs = end – start;
var usedMs = cancel – start;
var totalDays = Math.ceil(totalMs / (1000 * 60 * 60 * 24));
var usedDays = Math.ceil(usedMs / (1000 * 60 * 60 * 24));
var remainingDays = totalDays – usedDays;
if (totalDays <= 0) {
alert("Policy duration must be greater than 0 days.");
return;
}
// Pro Rata Calculation
var dailyRate = premium / totalDays;
var earnedPremium = dailyRate * usedDays;
var proRataRefund = premium – earnedPremium;
// Short Rate Calculation (Standard 90% of pro-rata refund or specific penalty)
// Usually, short rate is (1 – penalty) * proRataRefund
var shortRateRefund = proRataRefund * (1 – penaltyPercent);
document.getElementById('totalDaysText').innerText = totalDays;
document.getElementById('daysUsedText').innerText = usedDays;
document.getElementById('proRataResult').innerText = "$" + proRataRefund.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('shortRateResult').innerText = "$" + shortRateRefund.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('earnedPremiumText').innerText = "$" + earnedPremium.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('penaltySummary').innerText = "Includes a " + (penaltyPercent * 100).toFixed(0) + "% penalty on the unearned portion.";
document.getElementById('resultsArea').style.display = 'block';
}
Understanding Pro Rata vs. Short Rate Refunds
When an insurance policy is cancelled before its expiration date, the insurer must return the "unearned" portion of the premium to the policyholder. There are two primary methods used to calculate this refund: Pro Rata and Short Rate.
1. Pro Rata Method
Pro rata is the most straightforward calculation. It divides the total premium by the number of days in the policy period to find a daily rate. The refund is simply the daily rate multiplied by the number of days remaining. This method is typically used when:
The insurance company cancels the policy.
The policy is cancelled for a reason specifically allowed in the contract without penalty.
2. Short Rate Method
The short rate method applies a penalty to the refund. This is used when the policyholder requests cancellation before the end of the term. The penalty covers the administrative costs the insurer incurred to set up the policy. In most commercial and personal lines, the short rate penalty is roughly 10% of the unearned premium (meaning the insured receives 90% of the pro rata refund).
Practical Example
Imagine a 1-year policy costing $1,200. If you cancel exactly halfway through (182.5 days):
Pro Rata Refund: $600.00 (The full 50% remaining).
Short Rate Refund (10% Penalty): $540.00 (90% of the $600 unearned portion).
Tip: Always check your policy's "Cancellation" provision. Some modern policies are "Fully Earned," meaning no refund is given upon cancellation, regardless of the date.