Identification

• A cancellation is an action taken by an insurance company or policyholder to terminate coverage. A lapse occurs when coverage ends because the policyholder cannot or will not continue to pay the policy premiums.
  
  

Significance

• When an insurance company cancels a policy for reasons such as a high claims frequency, it may allow the policyholder to obtain a new substandard policy that requires a much higher premium. If a policy lapses but the insured has a favorable claims history, the insurance company may reinstate the policy provided the policyholder pays any back premiums that she owes.
  
  

Considerations

• If you elect to cancel your policy in the middle of a term, your company will use a short-rate table to determine how much money it will refund to you. You will typically be required to pay an additional charge to account for the insurance company's fixed expenses that result from processing the cancellation, such as labor costs.