The way I would like to see this as a customer would be.
I'm able to cancel the auto-renew. Once I do that with email I will get a warning that says: "We will attempt to cancel renewal the last date of your subscription. If your account exceeds the free quota, your account WILL renew."
As the date for the renewal comes closer and the user exceeds the free quota, as a user I will repeatedly get mail that the account will renew unless it meets said free quota.
Some customers would throw a fit if they paid a renewal fee after scheduling cancellation - for good, legal reasons.
Some customers would throw a fit if a cancellation scheduled >1 year ago resulted in random emails getting deleted (imagine the last photo taken of a lost family member being in those emails).
Between both options, neither is appealing. It seems as though the current option is best, but I do like your suggestion too: the best of both options, with the risk of something lost (subscription money) being replaceable/refundable in the event of an honest error.
I'm able to cancel the auto-renew. Once I do that with email I will get a warning that says: "We will attempt to cancel renewal the last date of your subscription. If your account exceeds the free quota, your account WILL renew."
As the date for the renewal comes closer and the user exceeds the free quota, as a user I will repeatedly get mail that the account will renew unless it meets said free quota.