State Farm Insurance License Practice Exam

What happens in a short rate cancellation of an insurance policy?

1. The insured receives a full refund

2. The premium is refunded without penalties

3. The insurance company retains part of the premium

4. The policy cancels at the expiration date

The correct answer is: The insurance company retains part of the premium

In a short rate cancellation of an insurance policy, the insurance company retains part of the premium. This type of cancellation occurs when the insured decides to terminate the policy before its expiration date, and it typically results in a penalty where the insurer keeps a portion of the premium as compensation for the time the policy was in force. The methodology for calculating the refund is often based on the time the policy has been in effect and includes additional factors that result in a reduced refund compared to prorated cancellations. Prorating would involve returning a proportionate amount of the premium without penalties, which is not the case with short rate cancellations. Therefore, in this scenario, the correct answer reflects the retention of a portion of the premium by the insurance company when a policy is canceled mid-term.