So you use your tax refund as a down payment on a new car, or at least one new to you. You get the new car; you get your new, affordable car insurance policy in writing; you're good to go. Unfortunately, at some point down the road you may receive a notice that your policy will become ineffective in X number of days (it varies from state to state). It's important to understand exactly why the policy is expiring because it means the difference between a mere inconvenience and payback for an event you can't seem to live down.



Let's start with the best-case scenario. If you're lucky, the going rate for the coverage you have is still good, and your insurance company will offer a renewal at the same rate. On the other hand, the insurance company may change its mind. Sometimes an insurer will agree to renew your policy, but on different terms. In such cases, the carrier is required to mail you notification of the change in terms, usually received 60 or 90 days before your policy expires. Usually, if the rate is below 25 or 30 percent, state law does not require this type of notification.

On the other hand, the insurance company may choose to simply drop you from its client list. Don't take it personally—sometimes non-renewals are the result of an insurance company withdrawing its business from a whole state or area of insurance. Other reasons include lapses in payment or an increase in your license points or reported claims. The company must justify dropping you, as well as give you ample notice before the policy expires and repay you for services or coverage not rendered. Note that for some companies, merely calling to inquire about company policy counts as a claim, so for heaven's sake, don't give your name when making this type of call. Keep in mind that only some companies allow for a grace period between policy periods if you don't pay by the expected deadline, so pay on time or risk being "dropped."

But, just suppose, you fudged a little bit when you were filling out your policy application, and you knew it when you were doing it. There's a difference between getting it wrong, and tweaking your application to your advantage. The latter can result in policy cancellation, which is when a carrier simply terminates your policy, even if it's before your renewal date or the policy's expiration. The good news is that the company still must repay you for the remainder of the policy you paid for; the bad news is that you might have a bit of a time finding another company to cover you. Here again, the company must give you notice, so that you can start working on finding new coverage before the policy actually expires. Unfortunately, the notice period is not usually as generous as that for non-renewal. Other reasons for cancellation include nonpayment, as well as undeclared crimes or egregious at-fault events (accidents), even in a no fault auto insurance state.

Remember, most state laws require insurance companies to provide policies to all drivers, even if it's at the high price of high-risk auto insurance. So, chin up—it's not as bad as it could be.