Please fill in all fields correctly. Ensure cancellation date is after start date.
Calculation Breakdown
Days Policy in Force:0 days
Unearned Days (Remaining):0 days
Earned Premium (Pro-Rata):$0.00
Unearned Premium (Pro-Rata Refund):$0.00
Short Rate Penalty Amount:-$0.00
Final Refund Amount:$0.00
function calculateShortRate() {
var premiumInput = document.getElementById('srcTotalPremium').value;
var penaltyInput = document.getElementById('srcPenaltyRate').value;
var startDateInput = document.getElementById('srcStartDate').value;
var cancelDateInput = document.getElementById('srcCancelDate').value;
var errorDiv = document.getElementById('srcError');
var resultsDiv = document.getElementById('srcResults');
// Reset display
errorDiv.style.display = 'none';
resultsDiv.style.display = 'none';
// Validation
if (!premiumInput || !penaltyInput || !startDateInput || !cancelDateInput) {
errorDiv.innerText = "Please fill in all fields.";
errorDiv.style.display = 'block';
return;
}
var premium = parseFloat(premiumInput);
var penaltyRate = parseFloat(penaltyInput);
var start = new Date(startDateInput);
var cancel = new Date(cancelDateInput);
// Validate numbers
if (isNaN(premium) || isNaN(penaltyRate) || premium < 0 || penaltyRate < 0) {
errorDiv.innerText = "Please enter valid positive numbers for premium and penalty.";
errorDiv.style.display = 'block';
return;
}
// Validate Dates
if (cancel totalPolicyDays) {
errorDiv.innerText = "Cancellation date exceeds the standard 1-year policy term.";
errorDiv.style.display = 'block';
return;
}
var unearnedDays = totalPolicyDays – diffDays;
// Financial Calculations
var dailyRate = premium / totalPolicyDays;
var earnedPremium = dailyRate * diffDays;
var unearnedPremium = premium – earnedPremium; // Also known as Pro-Rata Refund
// Calculate Short Rate Penalty
// Logic: Penalty is applied to the Unearned Premium (the refund portion)
var penaltyAmount = unearnedPremium * (penaltyRate / 100);
var finalRefund = unearnedPremium – penaltyAmount;
// Rounding to 2 decimals
var earnedDisplay = earnedPremium.toFixed(2);
var unearnedDisplay = unearnedPremium.toFixed(2);
var penaltyDisplay = penaltyAmount.toFixed(2);
var finalDisplay = finalRefund.toFixed(2);
// Update DOM
document.getElementById('resDaysForce').innerText = diffDays + " days";
document.getElementById('resDaysUnearned').innerText = unearnedDays + " days";
document.getElementById('resEarnedPremium').innerText = "$" + earnedDisplay;
document.getElementById('resUnearnedPremium').innerText = "$" + unearnedDisplay;
document.getElementById('resPenaltyAmount').innerText = "-$" + penaltyDisplay;
document.getElementById('resFinalRefund').innerText = "$" + finalDisplay;
resultsDiv.style.display = 'block';
}
How to Calculate Short Rate Cancellation
Understanding insurance refunds can be complex, especially when you decide to cancel a policy before its expiration date. While a "pro-rata" cancellation refunds exactly what you haven't used, a short rate cancellation allows the insurer to retain a penalty fee to cover administrative costs.
What is Short Rate Cancellation?
Short rate cancellation is a method used by insurance companies to calculate the unearned premium returned to the insured when the insured cancels the policy prior to the expiration date. It differs from pro-rata cancellation, which is typically used when the insurer cancels the policy.
The "short rate" is essentially the pro-rata refund minus a penalty percentage. This penalty compensates the insurance carrier for the upfront costs of underwriting and issuing the policy.
The Short Rate Formula
While some insurers use specific factor tables based on days in force, the most common generic calculation (and the one used in the calculator above) involves applying a penalty percentage to the unearned premium. Here is the step-by-step logic:
Determine Earned Premium: Calculate the daily rate of the policy (Annual Premium ÷ 365) and multiply by the number of days the policy was active.
Determine Unearned Premium (Pro-Rata): Subtract the Earned Premium from the Total Annual Premium.
Calculate Penalty: Multiply the Unearned Premium by the Penalty Rate (commonly 10%).
Final Refund: Subtract the Penalty from the Unearned Premium.
Example Calculation
Let's assume you purchased a commercial liability policy for $1,200 per year, starting on January 1st. You decide to cancel the policy on June 30th (approximately 181 days later). The penalty rate is 10%.
Step
Calculation
Result
Daily Rate
$1,200 ÷ 365
$3.29 / day
Earned Premium
$3.29 × 181 days
$595.49
Unearned Premium
$1,200 – $595.49
$604.51
Penalty (10%)
$604.51 × 0.10
$60.45
Refund Amount
$604.51 – $60.45
$544.06
Pro-Rata vs. Short Rate
It is crucial to know which method your carrier applies:
Pro-Rata: You get back 100% of the unused premium. Example: If you cancel halfway through the year, you get exactly 50% of your money back.
Short Rate: You get back less than the unused portion because the carrier keeps a fee.
Why do insurers charge a short rate penalty?
Insurance companies incur the majority of their administrative costs (underwriting, agent commissions, system setup) at the beginning of the policy term. If a policy is cancelled early, the premiums collected up to that point may not be enough to cover these initial expenses. The short rate penalty bridges this gap.