How to Calculate a Short Rate

Insurers discourage policy cancellations by charging short rates.
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Insurance companies frequently include a "short rate" penalty for cancellation. The short rate reduces the size of any refund you receive if you cancel coverage early. Insurers use a couple of methods to calculate a short rate. Which method applies to a particular policy depends on the terms of the contract.

Short Rate Table Method

Some insurers base short rates on a table that's usually included with your policy documents. To calculate the short rate, first count the number of days elapsed since the policy took effect. Suppose your coverage started on Jan. 1 and you cancel as of Aug. 7. That's 219 days. Look on the short rate table. It might say, "69 percent for 219 days." That's how much of your premium the insurer will keep. If the annual premium is $1,500, multiply this amount by 69 percent and you get $1,035. If you already paid the entire premium, the insurer refunds the remaining $465.

Short Rate Pro Rata Method

Insurers may use a pro rata short rate by calculating the premium for part of a year and reducing any refund by a set proportion such as 10 percent. If your coverage started on Jan. 1 and you cancel on Aug. 7, the pro rata amount works out to 219 divided by 365 multiplied by the annual premium. For an annual premium of $1,500, this example gives a prorated premium of $900. That leaves a remainder of $600. If the insurer imposes a penalty of 10 percent, reduce the refund by 10 percent or $60. You get $540 back.

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