It's a week until pay day. You're running short on funds, so you put your auto insurance bill in the "this will have to wait" pile. If you believe you're paying too much for auto insurance now, you'd better rethink that decision.

Even if you're only a day late with your premium payment, your insurance company may cancel your policy. And the company won't necessarily reinstate you once it gets your money. Furthermore, once your policy has been canceled, you may find yourself paying more money for a comparable policy or — worse yet — having trouble finding insurance at all!

Can they do that?

Each state has rules governing when an insurance company may drop your policy.

An insurance company will almost always be able to cancel your policy in the middle of its term — as opposed to nonrenewing it when the policy's up — if you fail to make a payment on time. Furthermore, on-time payment usually means your premium must be received by the due date. Dropping the payment in the mail by the due date isn't good enough.

Most auto insurers value your business and won't drop you if you're a few days late. Some companies, however, may seize that opportunity to kick you off their rolls if you're habitually late with payments or if they decide that you're a risk they no longer wish to insure. If you've passed the cancellation date, an insurer may require that you pay the remaining balance due for the full term before they reinstate your insurance.

No grace period for insurance

Many drivers mistakenly believe that there is a grace period for paying car insurance premiums. While many health and life insurance policies afford a grace period of 30 days — and state law sometimes mandates those grace periods — auto insurance usually doesn't work that way. If you're late in paying your auto policy premium, you're at the mercy of your insurance company. State insurance laws will, however, prescribe the number of days' notice that you're entitled to before the cancellation takes effect. But that's little consolation when you're on the verge of losing insurance.

If you've gotten away with paying your auto insurance a few days late in the past, don't count on your auto insurer being understanding forever. In many cases, the person canceled will complain to the state insurance department, arguing that the insurer always accepted late payments in the past. Although state insurance regulators are able to resolve many complaints, they may not be able to help someone who fails to pay premiums in a timely manner.

Shopping for new coverage is no picnic when you've been canceled

When you're shopping around for a new policy, insurance companies will find out you've been canceled for nonpayment of premiums. That may make you a person they don't want to insure, even if your driving record is clean. Or they may not allow you to purchase insurance through an installment plan, and insist on an upfront, annual payment instead. Many insurance companies also take credit history into account when they set their prices. Their underwriters believe that people with bad credit are more likely to become involved in accidents. (Credit scoring, as it's called, has been criticized as being discriminatory to the poor and minorities, but most states allow it.)

In the worst case, you may find that you'll have to buy auto insurance from a "nonstandard" or high-risk carrier. These companies take on customers who are less-desirable risks, usually because of their driving records. You'll always fare better if you can find coverage in the preferred or the standard market. Drivers classified in the preferred category pay the lowest premiums. On the other hand, if your driving record isn't perfect and you're viewed as a bad credit risk, you may run into real problems. Your only option might be your state's last-resort auto insurance program, often called the Assigned Risk Plan.

Bite the bullet and tell the truth

If you apply for a policy from a different company, you must answer truthfully about your driving record and why your previous policy was canceled. In many states, an insurance company will write your policy but still has 60 days to investigate whether you've told the whole truth and nothing but the truth. If you've fibbed on your application and the company finds out within the 60 days, it can refuse to continue your coverage.