The Risks of Changing Insurance Companies

Change insurance companies before doing your research and you risk cancellation fees, higher insurance rates, coverage lapses and more. Specifically, you should calculate how much you will pay overall if you lose bundling and loyalty discounts from your existing insurer. However, switching to a new carrier is generally a good idea if you’re paying less overall and receive better service.

Potential Risks of Changing Your Home or Auto Insurance Company

Changing your home or auto insurance company without proper research can result in paying more overall, lapses in coverage and cancellation fees.

What You May Pay Overall

Switching to a new policy with lower rates may have you thinking that you’re saving money, but don’t forget to consider discounts from your current insurer. A bundling discount, for example, can lower your rates on two types of policies, resulting in lower rates overall. If you lose your bundle discount, you may pay more.

Example: Say you have a 20% bundling discount because you have a home and auto policy with the same insurer. You’re paying $1,000 annually for home insurance and $1,000 for auto insurance after the discount. After switching car insurance companies, your car insurance premium is now $980 per year. However, your home insurance increases to $1,250. You saved $20 on car insurance but you’re paying $230 extra overall because you lost the savings from the bundling discount.

You Risk a Lapse in Coverage

If you’re not careful, you may schedule your new policy to begin after your current policy ends, creating a lapse in coverage. Lapses in coverage are an automatic red flag to insurance companies and even just one day of not being insured can result in higher insurance rates in the future.

You should always schedule your new policy to start either the same day when your current policy ends or beforehand. If you cancel your existing policy mid-policy, you may qualify for a prorated refund for the unused coverage period, depending on your insurer.

Changing your home or auto insurance company without proper research can result in paying more overall.

You Can Incur Cancellation Fees

Not all insurance companies charge a cancellation fee for canceling a policy early but you should double-check. If your carrier does charge a cancellation fee, consider scheduling for your new policy to start when your current policy ends. Otherwise, you should ensure that the amount you save from switching to a new company is more than the cost to cancel your current policy early.

You Lose Loyalty Benefits

Many national carriers offer a discount to customers that have stayed insured with them for a certain amount of time — typically one to three years. These discounts incentivize policyholders to stick with their current insurance company instead of shopping around. If you currently maintain a loyalty discount and switch companies, make sure your new policy costs less than your current policy after factoring for discounts.

National home and car insurance providers that offer loyalty discounts include:

State Farm
Allstate
Farmers
USAA
Mercury

Can I Change Insurance Companies Before the Renewal Date?

Customers can generally change their homeowners insurance or car insurance at any time during the policy period. Before canceling your current policy early, you should check with your insurance agent about the cancellation process and if any fees will apply. Alternatively, you can schedule your policy from the new insurance company to start on the same day your current policy ends.

How Often Should You Change Home or Auto Insurance Companies?

Shopping around every six to 12 months is generally a good idea to ensure you’re finding the best rates available. A home insurance policy typically lasts 12 months, while a car insurance policy is sold in either six- or 12-month terms. You should aim to switch insurance companies either on the date your policy ends or before to avoid lapses in coverage.

Certain life events may also prompt you to shop around and switch insurance companies. For example, you may want to switch carriers in the following scenarios:

Getting married and adding your spouse and children to your auto insurance policy
Your child getting their driver’s license and joining your auto policy
Moving homes
A family member joining the military (you may qualify for a military discount or a USAA policy, which carries unique military perks)

Are There Penalties For Switching Multiple Times?

There are generally no penalties when switching carriers. Insurance companies will not charge higher rates based solely on how many times you have switched insurance companies.

You should not expect your credit score to worsen, either. When getting insurance quotes, the insurance company may do a soft pull on your credit report. Unlike a series of hard inquiries, soft inquiries will not harm your credit score.

When Not To Switch Insurance Companies

In some instances, you may be better off sticking with your insurance company or waiting for your current policy to expire before switching to a new company.

Consider the following before purchasing a new home or auto policy:

You recently got into a car accident: Insurers apply a premium surcharge to your policy after a car accident, typically when you renew your policy. Switching car insurance companies mid-policy may lead to paying elevated rates earlier than you have to.
Loss of discounts leads to higher overall costs: The savings from a multi-policy discount, for example, may be higher overall if you bundle home and auto. Switching to a new auto insurance carrier may result in a lower premium for that policy but can significantly increase the cost of your home insurance.

If you’re not careful, you may schedule your new policy to begin after your current policy ends, creating a lapse in coverage.

Switching Life Insurance Companies

Life insurance is often a long-term investment and is more complicated than shorter-term home and auto policies. Beyond paying cancellation fees, you may also face another medical exam and contestability period if you switch carriers.

You Can Incur Surrender Charges

Canceling your policy before the term expires can incur a cancellation fee or surrender charge. If you’ve accrued cash value (for permanent life insurance), you incur a surrender charge for canceling the policy early. Talk to your life insurance agent about the cancellation process before purchasing the policy.

You May Need To Take Another Medical Exam

When you buy a permanent life insurance policy, you’re typically required to have one medical exam and the rate you get is locked in for life. Switching to a new company may require you to undergo another medical exam at a higher age. Your more advanced age and potential health issues will almost certainly subject you to higher insurance rates.

Switching to a new company may be a better fit with term life insurance, which typically carries terms of five to 30 years (versus lifelong coverage on permanent life policies). When your term ends, you can switch to a new company that offers lower rates.

You May Be Subject to Another Contestability Period

The contestability period in a life insurance policy is the time window an insurance company can challenge a life insurance claim for fraud or misrepresentation. The period typically lasts two years.

If you’ve been with your life insurance companies for several years and decide to switch, you may need to undergo another contestability period with the new life insurance company. This can create some delays in your beneficiaries receiving the death benefit if the new insurer disputes the claim and conducts an investigation.

You Can Cancel Within the Free-Look Period

Whether you’re buying an insurance policy for the first time or switching to a new company, we recommend asking the company about their “free-look period.” Policyholders will have a short window — typically 10 days after purchasing the policy — to look around and see if the policy is a good fit for their needs. If it doesn’t work out, policyholders can have their policy canceled and money refunded without penalty.

Canceling a life insurance policy early on if it isn’t the right fit can save you time, money and headaches later on. Life insurance policies generally do not have the same flexibility as auto and home policies, which carry terms of six to 12 months.

How To Switch Insurance Companies

To switch insurance companies, you will want to collect quotes from multiple insurers, ensure your new policy’s start date won’t create a lapse in coverage and notify your lender (if your car or home is being financed).

Shop Around

To ensure you’re getting the best rate available, you will want to shop around for quotes from multiple insurers. If you’re benefiting from a bundle discount, then you may even want to get quotes for multiple types of policies. Be sure to ask about other discounts available, to maximize your savings.

Remember that a bundling discount can lower your rates on two types of policies, resulting in lower rates overall.

Beyond pricing, you should also research the company’s dependability and service. Reading customer reviews and consulting third-party raters, like J.D. Power can also be useful resources.

Confirm the Cancellation Process With Your Existing Insurer

Ask your insurance company about the implications of switching to another insurance company. Specifically, you will want to ask the following questions:

Are there any cancellation fees?
Will I be entitled to a prorated refund if I switch mid-policy?
What date will my current policy end?

Buy Your New Car Insurance Policy Before Terminating Your Old Policy

After confirming when your current policy ends, you should schedule for your new policy to start on that date or before. This will help you avoid a lapse in coverage, which can lead to higher rates in the future.

If you’re switching auto insurance companies, you should expect a new proof of insurance card in the mail. You should safely store this in your vehicle and have it readily accessible in case you get into an accident.

Notify Your Lender

Whether you’re financing a home or a car, your lender will require you to carry insurance. If you’re switching insurance companies, you should notify your lender of the insurance carrier change. Otherwise, your lender may believe you’re neglecting the insurance requirement and may even purchase a separate (and often more costly) policy on your behalf — more money out of your pocket.

Not all insurance companies charge a cancellation fee for canceling a policy early but you should double-check.

FAQs

Is switching insurance plans or carriers often bad?

Switching home or auto insurance companies is not bad, but you should make sure you’re not paying more overall and that the new company has good customer service and claims history.

Does changing insurance companies impact your credit score?

Home and auto insurance quotes generally result in only soft pulls on your credit report, which should not hurt your credit score.

Is it worth it to switch insurance carriers?

If the new home or car insurance company can offer you equal or more coverage and superior service at a lower rate, then it is worth it to switch insurance companies. Just be sure that the loss of a loyalty or multi-policy discount will not result in you paying more overall.

Can I change my car insurance coverage at any time?

Yes, switching car insurance companies is possible mid-policy or when the term expires. However, be sure to consult your insurance agent about cancellation fees. Ask if there is a prorated refund for the unused coverage period. Make sure there is no lapse in coverage when you switch.

Key Takeaways

If you’re not careful, switching insurance companies may disqualify you from certain discounts so you end up paying higher insurance rates overall.
Whether you switch companies mid-policy or when it expires, be sure to avoid a lapse in coverage, which will cause your rate to go up.
Certain life events, like getting married, joining the military or gaining a teenage permit driver are reasons to start shopping around for a different insurer.
If switching to a new life insurance company, you will likely pay higher rates because rates are closely tied to your age and health.

Thinking about switching auto or home insurance carriers? SmartFinancial’s free online tools can analyze carriers in your area to help you find the insurance coverage you want at the cheapest price. Just enter your zip code below or call 855.214.2291 to receive your free insurance quotes in minutes.

The Risks of Changing Insurance Companies

Dan Marticio

Fran Majidi

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