Should You Allow Car Insurance Coverage to Lapse?

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The downturn in the economy has led to dramatic impacts across the United States – from those who are out of work, to those who have decided that they simply can no longer afford their car insurance policies and canceling them. While the decision to not carry insurance might seem like an easy way to save money in the short term, we’d caution that the long term consequences heavily outweigh any short term benefit.

Here’s one reason why: Most car insurance companies will immediately consider anyone who has allowed an insurance policy to lapse, be that through non-payment of premiums or the cancellation of a policy while you still own and drive a car a high risk to insure. Some will even place drivers into a higher risk bracket simply for being late on payments, even if the insurer doesn’t cancel a policy for non-payment of premiums.

And insurance companies have data to backup their placement of such drivers into higher risk brackets, as well. It isn’t simply a perception of an increased risk, but it is backed up with real statistical data – individuals who let their insurance lapse are much more likely to be involved in an car crash and make a claim.

“So what?” you might ask. “What’s going to happen?”

You’ll pay higher premiums, that’s what. On average, a driver who has allowed an insurance policy to lapse will end up paying 5.7% more for their insurance than they were before. And that number will rise even higher if you’re insuring multiple cars – going up to around 12%. That’s if your insurer is willing to reinstate your policy once it has lapsed. You may have no alternative but to look to other insurance companies.

While you may not have to go with another insurer, it may be the only way you can get coverage at a rate below or at least equal to what you had through your original insurer. In the end though, it is better not to let your insurance lapse, so you can avoid paying more or having to look for a new insurer.

That’s not the worst that can happen, however. Insurers can cancel your policy for non-payment of premium, even if you didn’t intend to allow your policy to lapse. Not paying the bill on your auto policy is one of the most common reasons that insurance companies will cancel your policy. Even if they don’t cancel you outright, the insurer may issue a do not renew flag on your policy (this is called a DNR, for Do Not Renew) you’ll either have to convince your insurer to keep you or obtain a new insurance provider once your policy lapses.

So can you cancel an insurance policy?

Of course, you can cancel an auto insurance policy. Consumers do this every day, but not all of them understand the process. There are two reasons why you might want to consider canceling your car insurance policy:

  • You’ve decided to switch insurance companies, and you have another policy in place – yes, have your new policy in effect before you cancel the old one.
  • You’ve sold your car and informed the DMV and/or transferred the title of the car to the new owner.

Canceling a policy without either of those two happening will result in either an actual or perceived lapse in your insurance. This can lead to legal fines or penalties, depending upon your state, as all insurers are required to notify state department of motor vehicles of any policy lapse or cancelation.

If you continue to drive without insurance, legal fines may be the least of your worries, however.  Drive without insurance, and if you’re involved in a crash, you’ll be looking at paying all costs directly out of pocket. If you’re at fault for such a crash, you could be on the hook for thousands of dollars due to the other driver. In both traditional tort-system states and no-fault states, a court may order a judgement against you in regards to the collision, and may even order the sale of your assets, including your home and garnishment of all future wages to help pay the judgement.

In the end, while allowing a policy to lapse may offer a short term financial gain, the potential long term costs simply make this untenable. If you cannot pay your policy premiums, work with your insurer to either lower your costs by eliminating extra coverages, raising your deductibles, or stop driving. Your wallet will thank you in the end.

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