Standard short rate is typically 10% of the unearned premium.
Cancellation Breakdown
Total Policy Duration: days
Days Used: days
Days Remaining: days
Pro Rata Refund (No Penalty):
Short Rate Refund (With Penalty):
Penalty Fee:
Understanding Pro Rata vs. Short Rate Cancellation
In the insurance and subscription industries, there are two primary methods for calculating a refund when a policy or contract is canceled before its expiration date. Understanding the difference between Pro Rata and Short Rate is crucial for policyholders and business owners alike.
What is a Pro Rata Refund?
A "Pro Rata" cancellation occurs when the insurer returns the full unearned premium to the policyholder without any penalty. This is common when the insurance company cancels the policy or when it is legally required. The calculation is simple: it is based purely on the proportion of time remaining in the policy period.
Formula:(Total Premium / Total Days in Period) × Days Remaining
What is a Short Rate Refund?
A "Short Rate" cancellation typically occurs when the insured chooses to cancel the policy early. In this scenario, the insurance company is permitted to retain a portion of the unearned premium to cover administrative costs and lost commissions. This penalty is often 10% of the unearned premium amount, though this varies by state and policy type.
Formula:Pro Rata Refund × (1 - Penalty Rate %)
Practical Example
Suppose you have a 12-month (365 days) insurance policy that costs $1,200. You decide to cancel the policy exactly halfway through the term (182.5 days).
Pro Rata Refund: $1,200 × (182.5 / 365) = $600.00
Short Rate Refund (10% Penalty): $600.00 × 0.90 = $540.00
In this case, the short rate penalty cost the policyholder $60.
Which One Applies to You?
Check your policy documents for a "Cancellation" provision. If the policy states it is "Short Rate," expect a penalty for early termination. If it says "Pro Rata," you should receive the full mathematical balance. Generally, if you are canceling a policy to switch to a different carrier, the short rate will apply.
function calculateRefund() {
var premium = parseFloat(document.getElementById("totalPremium").value);
var start = new Date(document.getElementById("startDate").value);
var end = new Date(document.getElementById("endDate").value);
var cancel = new Date(document.getElementById("cancelDate").value);
var penaltyPercent = parseFloat(document.getElementById("penaltyRate").value);
if (isNaN(premium) || isNaN(start.getTime()) || isNaN(end.getTime()) || isNaN(cancel.getTime()) || isNaN(penaltyPercent)) {
alert("Please fill in all fields with valid data.");
return;
}
if (cancel end) {
alert("Cancellation date cannot be after the expiration date.");
return;
}
// Calculate time differences in milliseconds
var totalTime = end – start;
var timeUsed = cancel – start;
// Convert to days
var totalDays = Math.ceil(totalTime / (1000 * 60 * 60 * 24));
var daysUsed = Math.ceil(timeUsed / (1000 * 60 * 60 * 24));
var daysLeft = totalDays – daysUsed;
if (totalDays <= 0) {
alert("Policy expiration must be after the start date.");
return;
}
// Pro Rata Math
var dailyRate = premium / totalDays;
var proRataRefund = dailyRate * daysLeft;
// Short Rate Math
var penaltyAmount = proRataRefund * (penaltyPercent / 100);
var shortRateRefund = proRataRefund – penaltyAmount;
// Display Results
document.getElementById("totalDays").innerText = totalDays;
document.getElementById("daysUsed").innerText = daysUsed;
document.getElementById("daysLeft").innerText = daysLeft;
document.getElementById("proRataResult").innerText = "$" + proRataRefund.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("shortRateResult").innerText = "$" + shortRateRefund.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("penaltyAmount").innerText = "$" + penaltyAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("results").style.display = "block";
}