Understanding Short Rate vs. Pro Rata Cancellations
When an insurance policy is cancelled before its expiration date, the insurance carrier must calculate how much of the premium to return to the policyholder. This is known as the "Return Premium." There are two primary methods used to calculate this amount: Pro Rata and Short Rate.
What is Pro Rata Cancellation?
Pro Rata cancellation is the most equitable method for the insured. It calculates the refund based purely on the number of days remaining in the policy term, without any penalties or fees.
This method is typically used when:
The insurance company initiates the cancellation (e.g., due to underwriting reasons).
The policy is being rewritten or replaced with the same carrier.
State laws mandate a pro rata refund for specific circumstances.
The Math: If you paid $1,000 for a 365-day policy and cancelled on day 182.5 (exactly halfway), you would receive exactly $500 back.
What is Short Rate Cancellation?
Short Rate cancellation applies a financial penalty for early termination. This penalty covers the insurer's administrative costs associated with setting up the policy, which they expected to amortize over the full policy term.
This method is typically used when:
The insured (you) requests the cancellation mid-term.
You switch to a different insurance carrier before your current policy expires.
The Math: The calculation usually starts with the Pro Rata unearned premium, and then a penalty percentage (commonly 10% of the unearned portion) is deducted. In the example above ($500 unearned), a 10% penalty ($50) would result in a $450 refund.
How to Use This Calculator
Total Premium: Enter the full cost of the policy for the term.
Dates: Input the start and end dates of the policy coverage, and the specific date you requested cancellation.
Penalty %: Enter the short rate penalty percentage defined in your policy documents (usually 10%, though historically tables were used).
Note: This tool provides an estimate. Actual refunds may vary based on specific carrier fees, state taxes, and minimum earned premiums.
function calculateRefund() {
// 1. Get Inputs
var premiumInput = document.getElementById('src_premium').value;
var startDateInput = document.getElementById('src_start_date').value;
var endDateInput = document.getElementById('src_end_date').value;
var cancelDateInput = document.getElementById('src_cancel_date').value;
var penaltyInput = document.getElementById('src_penalty').value;
// 2. Validate Inputs
if (!premiumInput || !startDateInput || !endDateInput || !cancelDateInput) {
alert("Please fill in all premium and date fields.");
return;
}
var premium = parseFloat(premiumInput);
var penaltyPercent = parseFloat(penaltyInput) || 0; // Default to 0 if empty
var startDate = new Date(startDateInput);
var endDate = new Date(endDateInput);
var cancelDate = new Date(cancelDateInput);
// 3. Validate Date Logic
if (endDate <= startDate) {
alert("Policy End Date must be after Start Date.");
return;
}
if (cancelDate totalDays) {
daysUsed = totalDays;
}
var daysRemaining = totalDays – daysUsed;
if (daysRemaining < 0) daysRemaining = 0;
// 5. Calculate Factors
var earnedFactor = daysUsed / totalDays;
var unearnedFactor = daysRemaining / totalDays;
// 6. Calculate Financials (Pro Rata)
var earnedPremium = premium * earnedFactor;
var unearnedPremium = premium * unearnedFactor; // This is the Pro Rata Refund
// 7. Calculate Financials (Short Rate)
// Standard Short Rate: Penalty is percentage of the UNEARNED premium
var penaltyAmount = unearnedPremium * (penaltyPercent / 100);
var shortRateRefund = unearnedPremium – penaltyAmount;
// 8. Display Results
document.getElementById('res_total_days').innerText = totalDays;
document.getElementById('res_days_used').innerText = daysUsed;
document.getElementById('res_days_remaining').innerText = daysRemaining;
document.getElementById('res_earned_premium').innerText = "$" + earnedPremium.toFixed(2);
document.getElementById('res_prorata_factor').innerText = (unearnedFactor * 100).toFixed(2) + "%";
document.getElementById('res_prorata_refund').innerText = "$" + unearnedPremium.toFixed(2);
document.getElementById('res_penalty_percent_display').innerText = penaltyPercent;
document.getElementById('res_penalty_amount').innerText = "-$" + penaltyAmount.toFixed(2);
document.getElementById('res_shortrate_refund').innerText = "$" + shortRateRefund.toFixed(2);
// Show result div
document.getElementById('src_results_area').style.display = "block";
}
// Optional: Pre-fill dates for easier testing
(function() {
var today = new Date();
var nextYear = new Date();
nextYear.setFullYear(today.getFullYear() + 1);
// Format to YYYY-MM-DD
var formatDate = function(d) {
var month = '' + (d.getMonth() + 1),
day = '' + d.getDate(),
year = d.getFullYear();
if (month.length < 2) month = '0' + month;
if (day.length < 2) day = '0' + day;
return [year, month, day].join('-');
}
document.getElementById('src_start_date').value = formatDate(today);
document.getElementById('src_end_date').value = formatDate(nextYear);
})();