Short Rate Insurance Cancellation Calculator

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Short Rate Insurance Cancellation Calculator

Standard industry penalty is usually 10% of the unearned premium.

Calculation Results

Days Policy was in Force:

Earned Premium (Pro-rata):

Unearned Premium (Pro-rata):

Short Rate Penalty Amount:

Estimated Short Rate Refund:

function calculateShortRate() { var premium = parseFloat(document.getElementById('annualPremium').value); var startDate = new Date(document.getElementById('policyStart').value); var cancelDate = new Date(document.getElementById('cancelDate').value); var penaltyPercent = parseFloat(document.getElementById('shortRatePenalty').value); if (isNaN(premium) || isNaN(startDate.getTime()) || isNaN(cancelDate.getTime()) || isNaN(penaltyPercent)) { alert("Please fill in all fields with valid information."); return; } if (cancelDate 365) daysActive = 365; var dailyRate = premium / 365; var earned = dailyRate * daysActive; var unearned = premium – earned; var penalty = unearned * (penaltyPercent / 100); var refund = unearned – penalty; if (refund < 0) refund = 0; document.getElementById('daysInForce').innerText = daysActive + " days"; document.getElementById('earnedPremium').innerText = "$" + earned.toFixed(2); document.getElementById('unearnedPremium').innerText = "$" + unearned.toFixed(2); document.getElementById('penaltyAmount').innerText = "$" + penalty.toFixed(2); document.getElementById('finalRefund').innerText = "$" + refund.toFixed(2); document.getElementById('resultsArea').style.display = 'block'; }

Understanding Short Rate Insurance Cancellation

When you cancel an insurance policy before its expiration date, the insurance company calculates your refund using one of two methods: Pro-rata or Short Rate. While pro-rata refunds the full unused portion of the premium, a short rate cancellation includes a penalty fee.

What is a Short Rate Penalty?

A short rate penalty is a charge levied by insurance carriers to cover the administrative costs associated with issuing and subsequently canceling a policy early. In the insurance industry, the standard short rate penalty is typically 10% of the unearned (remaining) premium. This means the insurer keeps the earned premium for the time you were covered, plus an additional percentage of what's left.

How the Calculation Works

The process follows these logic steps:

  1. Determine Earned Premium: The annual premium is divided by 365 to find the daily rate, then multiplied by the number of days the policy was active.
  2. Calculate Unearned Premium: This is the "pro-rata" refund amount (Total Premium minus Earned Premium).
  3. Apply Penalty: A percentage (usually 10%) is calculated based on the unearned premium.
  4. Final Refund: The penalty is subtracted from the unearned premium.

Short Rate vs. Pro-Rata Examples

Imagine you have a $1,200 annual premium and you cancel exactly halfway through the year (182.5 days).

  • Pro-rata Refund: You would receive exactly $600.00 back.
  • Short Rate Refund (10% penalty): The unearned premium is $600. The 10% penalty is $60. You receive $540.00 back.

When is Short Rate Applied?

Short rate cancellation is most common in commercial insurance, workers' compensation, and some specialized personal lines. It is generally applied when the insured party (the policyholder) requests the cancellation. If the insurance company cancels the policy for reasons other than non-payment, they are usually required by law to use the pro-rata method.

Note: This calculator provides an estimate. Some insurance companies use specific "short rate tables" (like the Rule of 78s or 90% factor) that vary slightly by state and policy type. Always check your specific policy documents for the cancellation clause.

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