What happens to the premium if the insurer cancels the policy within 5 days?

When an insurer cancels a policy within a short time frame, such as five days, the premium typically is refunded on a pro-rata basis. This means that the insurer returns the amount of premium that corresponds to the unearned portion of the policy. The essence of a pro-rata refund is that the insured only pays for the coverage they actually received—essentially calculating the portion of the premium that was for the time the policy was in effect.

This method of refunding ensures that the insured is not penalized for canceling the policy early. Since the policy will have been in force for a very short period, a pro-rata calculation is simple and fair, taking into account the exact number of days of coverage utilized. A pro-rata refund also aligns with standard insurance practice to ensure equitable treatment of policyholders when a policy is canceled shortly after inception.

In contrast, a short-rate basis refund would penalize the insured for an early cancellation by deducting an additional amount from the refund, and a full refund would imply the insured gets back all of their premium without deduction—which doesn’t reflect the time of coverage used. Lastly, the option of "no refund" would not be applicable here as it overlooks the standard practice of addressing the unearned premium