Action 9: Switching car insurance could inflict high penalty charge

Ally Street recently bought a used car which made her think about her car insurance.

She felt she was paying too much, so she decided to shop around.

She found a better rate, so she dropped Allstate and went with Nationwide.

"I opted to go with Nationwide, who provided a much better plan for about $30 less a month," she said.

Since she switched companies before her Allstate policy was up, she expected Allstate to give back some of her money.

But instead, the insurer charged her almost $68 for canceling the policy early.

"I'm like, 'You've got to be kidding me,'" Street said.

Allstate didn't have a choice.

No insurance company does.

If you cancel your policy before the renewal date, the insurer has to charge you a penalty.

It's called a "short rate premium," and it's North Carolina law.

Retired insurance agent Keith Franklin's advice: shop around, but try not to switch early, especially very early.

"If you switch after one month, you get a greater penalty than you do after five months. It diminishes the longer you go," Franklin said.

Laura Adams is a consumer expert with Insurance Quotes.

She said it may still make sense to change companies before your renewal date, but do the math.

"So the trick for consumers there is to really understand the net effect, right?  Am I going to save more by switching?" Adams said. "Even though I am penalized by my first company, does it make sense in the long-term to switch?  So, yeah, that's an interesting little bit of math for the average consumer to figure out."

Street urges others to learn from her experience.

"No one I have spoken with had heard of this short rate premium. That was alarming," she said.

Many people said the premium is unfair.

Others said the premium discourages customers from switching companies unpredictably.

If the company ends up covering claims for people who then stop paying in to the company, it throws off the math and then everyone's rates go up to cover the difference.

Cox Media Group