An insurance policy is a contract that’s valid for a specific duration. That duration is called the policy term, and it can vary depending on the type of insurance you’re talking about. Policy terms for homeowners insurance are often one year from the effective date, or the day and time that coverage begins, but life insurance policy terms are typically longer.
Whatever the length, you’re covered by the conditions detailed in the policy throughout the term. For example, your home insurance covers the cost of damage caused by perils that occur during the policy term.
Why policy terms matter
Policy terms seem really simple, but there can be a lag between when you buy your policy and when it goes into effect. That’s particularly true with homeowners insurance, where you may need proof of insurance before you actually own a home. Let’s look at an example to see how that might happen.
Imagine you’ve decided to buy a house and need to apply for a mortgage. Typically, your lender wants to know you have home insurance before it will offer a loan. But that means you need to insure a property you don’t even own.
The solution is by getting insurance where the policy term begins on the date the title transfers to you. Essentially, you want your policy’s effective date to be the same as the date when you officially own the house.
What happens when a policy term ends?
When your policy term ends, your insurance contract expires. However, your insurance company has to send you a renewal notice to:
- Let you know your policy term is ending.
- States any changes to your coverage or premium.
- Explains how to continue coverage.
Renewal notices usually show up about four to six weeks prior to the end of your policy term. This gives you time to decide if you want to continue with your current insurer. If you decide to cancel, the early notice also gives you time to buy a new policy so you can avoid a lapse.
Sometimes, however, your insurance company may not give you the option to renew. In that case, you’ll get a non-renewal notice instead of a renewal letter. Non-renewals can happen for several reason, such as your insurance company:
- Stopped offering your policy.
- Is no longer licensed in your state.
- Changed the risks it's willing to cover.
Again, insurance companies have to notify you before the end of your policy term so you have time to find new coverage. How much time varies by state, but you usually get a non-renewal notice at least one month before your policy term expires.
Can I cancel my policy during my term?
You have the right to cancel your policy at any time. Plus, your premium is based on what it costs to insure you for the entire policy term, so your insurance company typically returns a portion of it to you. At least, that’s the way we do it. Other insurance companies may charge penalties and fees if you cancel before your policy term expires.
Can my insurance company cancel my coverage during my policy term?
Your insurance company can cancel your policy in a couple of situations. For example, it can cancel coverage for any reason during the first 60 days of the policy term. This might happen if it discovers an undisclosed risk like a swimming pool during final underwriting. After that, your insurance company can only cancel you for nonpayment of premium or you misrepresented information on your insurance application.
Can I adjust my policy term?
You usually can’t shorten your policy term once coverage is in effect. However, you can cancel your coverage at any time. So say you’re flipping a house and only need insurance while you’re renovating. In that case, you may want to get a standard one-year policy and then cancel it when the home is no longer in your name. Similarly, you can’t make your policy last longer, but you can choose to renew it when your policy term is up. Just remember that your insurance company may adjust your coverage or premium at that time.
