The return premium factor is calculated by dividing the number of days remaining in the policy period by the total number of days in the policy. The reduced-rate cancellation method is similar to the pro-rated one, but it also includes a penalty as a disincentive for early cancellation. In other words, the insured person receives a lower reimbursement with this calculation. From the insurance company's perspective, a short-term cancellation penalty covers its administration costs.
It also better balances the money they raise with their chances of paying a loss. The pro-rated method applies when the insurance company initiates the cancellation and, in some cases, when the insured does. Insurance companies may have a specific deadline for GAP insurance reimbursements, but you can usually request a refund at any time before the policy period expires. Guaranteed auto protection (also known as GAP insurance) is an insurance policy that offers a refund if the car is stolen or completely destroyed and you still owe money from the car's car loan.
This means that the insured only ends up paying for the number of days that the insurance contract is actually in force. The pro rata and the short rate are two different ways of determining the amount of reimbursement that an insured party will receive if their insurance policy is canceled before the expiration date. The cancellation methods used for motorcycle and snowmobile insurance are different from those used for car insurance.