A cancellation fee is a charge an insurer applies when a policyholder ends a policy before its term finishes. It covers administration costs and is set out in the policy, on top of any deduction for cover already used.
In one line: A cancellation fee is a charge for ending an insurance policy before the term is up.
How a cancellation fee works
Insurers set out cancellation fees in the policy documents. Cancelling within the 14-day cooling-off period usually limits charges, while cancelling later typically means a fee plus a deduction for the days of cover already provided.
On a 600 GBP annual policy cancelled after six months, the insurer might keep 300 GBP for the cover used and apply a 50 GBP cancellation fee, leaving a refund of around 250 GBP, assuming no claim was made.
If a claim has been made during the year, many policies provide no refund at all, because the full annual premium becomes due.
Cancellation fee vs cooling-off period
The 14-day cooling-off period under FCA rules lets a new policyholder cancel with only limited charges. A cancellation fee usually applies in full once that window has passed and the policy is ended mid-term.
A cancellation fee is distinct from a mid-term adjustment fee, which covers changing rather than ending a policy.
Primary source: FCA: Insurance
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