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How to correctly drop your car insurance

Did you recently move to another state? Have you decided to change insurance companies? Perhaps you sold your car because you don't need to drive anymore.

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In any case, you must inform your insurance company that you're canceling your coverage — or else at the end of the policy period, you may owe your insurance company money.

Most car insurance policies say that you, the insured, can cancel your policy at any time during the policy period by sending a written notice stating the effective date of cancellation. That sounds reasonable enough, but what happens if you decide to switch companies at the end of the policy term? Doesn't your policy automatically terminate at the end? The answer is no.

No fine print to read

If your insurance is canceled for any reason, it may haunt your insurance future.

There are two important things you must know if you don't inform your insurance company of your decision to terminate, even if it's at the end of your policy period. First, the insurance company will send you a bill for your next premium payment. Second, when it doesn't hear from you, the insurance company is going to formally cancel your policy because you failed to pay your premiums on time — and that will go on your credit report.

If your car insurance policy is canceled, it will likely haunt your insurance future. Cancellation is a red flag for insurance companies looking at prospective customers. If an insurer sees on your claims history that you've recently been canceled, even if your credit rating is good, that may be the basis for denying coverage or charging you a steep rate as a "risky" applicant.

What to do

In order to avoid the mess that comes with being canceled, here's what you should do. Call your agent or the insurance company and inform them that you wish to cancel your coverage. Be sure to let them know the date, because if you're not specific, you may end up unwittingly driving around without insurance. Your insurer will then send you a cancellation-request form. The form will likely have all the information filled out when you get it, so you only need to sign it. Take care, however, to look over the information that your agent or the company filled in; mistakes do happen.

In addition, if you switch insurers and fail to formally cancel your previous policy, you're going to have to prove to your former insurance company that you have new coverage. Typically, all you need to do is send a copy of either your current insurance identification card or the front page of your new premium statement. Make sure that the document has your name and your current policy number on it, and send it along with the cancellation form. Of course, if you've moved to a state in which auto insurance is not required, you don't have to prove you have new coverage. You'll likely receive confirmation by mail that your cancellation request has been processed.

If you've paid your annual premium up front, but choose to cancel your policy midway through the year, you may be entitled to a premium refund. But it's not guaranteed. A sample policy reads: "The premium refund, if any, will be computed according to our manuals. However, making or offering to make the refund is not a condition of cancellation."

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