Which of the following provisions allows an insured or the insurer to terminate the policy?

What Is Cancelable Insurance?

Cancelable insurance is a type of policy that either the insurance company or the insured party may terminate in the midst of the coverage term. Many types of insurance, with the exception of life insurance, can be structured in this way.

Key Takeaways

• Cancelable insurance is a type of policy that either the insurance company or the insured party may terminate during the coverage term.
• Usually, the insured can terminate a cancelable policy at any time, but If the insurer cancels the policy, they must give advanced notice and also refund any prepaid premium.

Typically, the insured can terminate a cancelable policy at any time. If the insurer cancels the policy, however, the firm must give notice to the policyholder and must also refund any prepaid premium on a pro-rata basis.

Of note, some states may have different regulations as to the conditions under which many types of insurance policies may be canceled.

An insurer may send the holder of a cancelable policy a notice mid-term that they need to pay significantly higher premiums to continue coverage, or they may have their coverage-limits lowered if they want their premiums to stay the same. This still falls under the definition of cancelable insurance, as the original policy will have canceled during the initial coverage period.

How Cancelable Insurance Works

Cancelable insurance differs from two main other insurance types: non-cancelable policies and guaranteed renewable policies. In a non-cancelable policy, the policy provider may not terminate the insurance, nor can they raise premiums for the duration of the original coverage period—provided the policyholder continues to pay the premiums. A guaranteed renewable policy also cannot be canceled and coverage limits cannot be altered by the insurance company mid-term, provided that the holder pays premiums on time. However, premiums for the entire coverage group can increase under a guaranteed renewable policy.

In certain circumstances, an insurance company may also offer optionally cancelable policies. These allow the insurer to either terminate a policy on a date set in the initial contract or extend coverage past the termination date. These may also be called conditionally renewable policies.

Advantages and Disadvantages of Cancelable Insurance

The cost of cancelable insurance is often less than that of a comparable non-cancelable or guaranteed renewable policy. However, this type of insurance may not be desirable when it comes to many common types of insurance, such as auto or home coverage.

Cancelable insurance comes with the risk that the policyholder may need to find alternative coverage during the notice period, or go completely uncovered once the notice period has expired. This may be very undesirable for many types of policies, but perhaps less so for insurance covering a specific piece of artwork or a piece of industrial equipment over a specific time frame.

Of course, the policyholder can also end a cancelable policy. Before canceling any insurance however, the policyholder may want to line up replacement insurance in advance.

What is a Conditionally Renewable Policy?

A conditionally renewable insurance policy contains a provision that permits the insurer to not allow a policy to be renewed under certain conditions. A conditionally renewable provision is generally offered to insureds in high-risk occupations and is frequently found in group or association type coverage.

Key Takeaways

• Conditionally renewable policies are an insurer-friendly policy option, as it allows the insurer greater freedom to cancel, not renew, or increase premiums on a policy under certain conditions.
• Conditionally renewable policies can be contrasted with noncancellable or guaranteed renewable policies, which are a more policyholder-friendly policy option.
• Conditionally renewable policies have lower insurance premiums on average because they offer a lower coverage guarantee.

How Conditionally Renewable Policies Work

The conditionally renewable provision in an insurance policy allows an insurance company to cancel immediately, not renew at the renewal date, or increase premiums on a policyholder under certain conditions. This provision benefits the insurer, not the policyholder. A conditionally renewable policy may be renewed unless the specific conditions outlined in the policy occur.

For example, a conditionally renewable disability policy may not allow a policyholder to renew their disability policy after switching jobs. The insurer may place this condition on the insurance policy if the new job is considered more risky than the prior job. The insurer places this condition on the policy because the increased risk associated with the new job is more likely to result in the policyholder making an injury claim.

Regulators typically outline the conditions in which an insurer can terminate an insurance policy. In the case of health insurance, insurers are not allowed to terminate a policy based on the health of the policyholder. Insurers may offer several different renewal options for the policies that they underwrite, including both conditionally renewable and noncancellable policies.

Conditionally Renewable Policies vs. Noncancellable Policies

On one end of the spectrum are policyholder-friendly options. These include noncancellable and guaranteed renewable policies. These allow the policyholder to continue renewing the policy without changes being made to the contract terms, and do not allow the insurer to add any conditions that may result in the policy being canceled. The premiums for a noncancellable and guaranteed renewable policy do not change during the noncancellable period, and the policy is guaranteed to renew.

On the other end of the spectrum are insurer-friendly options. These include conditionally renewable, cancellable, and optionally renewable policies. These allow the insurer to place conditions that allow the policy to be canceled at any time or not renewed at the next renewal date if conditions are not met. The insurer may increase the insurance premium on the policy if it does decide to let the policyholder renew for another period.

Advantages and Disadvantages of Conditionally Renewable Policies

Under a conditionally renewable policy, an insurer retains considerable power to cut its claims losses by refusing to renew coverage. Because of this ability, such policies generally have significantly lower premiums than either noncancellable or guaranteed renewable coverage. However, the lower premium comes with a consequence for the policyholder in the form of an equally significant reduction in coverage guarantee. Nevertheless, as long as the insured meets the conditions of renewability and remits the required premium on a timely basis, the insurer guarantees not to cancel the policy.

Which of the following provisions allows an insured to terminate the policy?

What type of policy allows the insurance company to cancel the policy at any time?

Which provision gives the insurer the right to cancel coverage?

What type of policy does not allow the insurer to change the premium or the coverage?