In this type of cancellation, an insurance company terminates a policy with a borrower due to non-payment or upon request by the policyholder before the expiration date on the policy.
A short-rate cancellation causes a penalty due to cancellation before the end of the agreed upon policy term.
This penalty is to create a disincentive to cancelling before the policy ends.
An insurance company wants to retain policyholders and the fee for cancelling is an attempt to dissuade many from doing so.
The total amount of the penalty will ultimately depend on the amount of the premium in the insured’s policy and the amount of time left on the policy upon cancellation.
Example of Short Rate (Cancellation)
If a policyholder pays $2,000 over a period of 12 months for coverage, but cancels after 6 months, this is considered to be a short rate cancellation.
Instead of automatically receiving $1,000 back for the remaining 6 months left in the policy, a short rate cancellation deems that the amount would be reduced, per the contract that the insurer created.
