Return premium is calculated when you cancel your insurance policy before the end of the policy term. The calculation of the return premium is determined by the insurer and is based on the details of the policy and when it is cancelled.
In most cases, the insurer will deduct administrative costs and charges associated with the policy before returning the premium. The specific terms and conditions of the policy will determine exactly how the return premium is calculated.
When returning the premium, the insurer will usually:
Calculate the unused portion of the premium, which is done on either a pro rata or a short-rate basis.
Apply associated costs, such as policy fees and taxes.
Deduct an administrative fee for cancelling the policy early or for any re-writes of the policy that were initiated by the policyholder.
The most important factor in determining how much premium will be returned is the cancellation date of the policy. Depending upon the insurer, the amount of unused premium will be based on either a prorated or short-rate basis.
If the unused portion of the premium is calculated on a prorated basis, the amount of premium returned to the policyholder can vary from 0 to 100%. For example, if a policy is cancelled halfway through the term, half of the original premium will be refunded.
If the unused portion of the premium is calculated on a short-rate basis, the amount of premium returned to the policyholder can vary from 0 to 95%. For example, if a policy is cancelled halfway through the term, the amount refunded would be less than half of the original premium.
It is important to understand how your policy works and that return premiums are calculated in different ways by different insurers. It is best to ask the relevant questions when getting a policy to make sure you understand how your insurer will calculate the return premium and what associated costs will be incurred.
For more information about return premiums, please refer to this page.