Part of understanding your auto insurance policy is sifting through a smattering of terms like deductible, coverage limits, and premiums – all of which are attached to a dollar amount. If that has you scratching your head and wondering, “What are car insurance premiums, and how are they calculated?” our team of insurance experts is here to explain.
In this article, we’ll examine what a car insurance premium is, factors that shape rates, and how you can save money on your next auto insurance policy. Our experts have also reviewed the best car insurance companies on the market and we’ll give our recommendations for cheap, reliable coverage here.
Shopping around for insurance and comparing companies is a great way to find the best rate. Use the tool below to start getting free quotes from the highest-rated insurance providers in your area.
In this article:
- What Are Car Insurance Premiums?
- How Are Car Insurance Premiums Determined?
- How To Get A Lower Premium
- Our Recommended Car Insurance Providers
- Frequently Asked Questions
What Are Car Insurance Premiums?
A car insurance premium is the amount you agree to pay an insurance provider for coverage. Auto insurance premiums can be paid in monthly installments or in a lump sum at the start of your policy. Once you’ve paid your premium, your insurer will be responsible for any coverages listed in your policy.
Most premiums are set in six-month periods, but some providers may offer year-long policies as well. Paying your premium in the agreed-upon terms means that your insurance provider protects you from financial liability in the event of a collision or other incident, depending on the protections laid out in your policy. Premiums are used across the insurance industry, so you’ll see them if you purchase something like renters or homeowners insurance as well.
The way car insurance rates are calculated varies from provider to provider, but in general, your personal information, vehicle information, driving history, and zip code all shape the price of a premium.
Another thing to note is that your insurance premium is different than your deductible. A car insurance deductible is the out-of-pocket cost you’re responsible for before your coverage kicks in when filing an insurance claim. So, for example, if you have a $500 deductible and incur $1,500 worth of damage in an accident, you’ll pay $500 and your insurer will put up the other $1,000.
How Are Car Insurance Premiums Determined?
Car insurance premiums are calculated using a number of factors based on the policyholder’s personal information, type of car, and driving history. The way these factors are weighed differs between insurers, but usually, you’ll pay more if you elect higher levels of coverage, if you’re an inexperienced driver, or if you have a recent accident on record.
Here is a breakdown of the main factors that go into car insurance premiums:
| Rate Factor | How It Affects Car Insurance Premiums |
|---|---|
| Age and driving experience | Average car insurance rates by age show younger drivers and inexperienced motorists tend to be more accident-prone while on the road, so they pay more for coverage. |
| Gender and marital status | Statistically, men are more likely to be involved in a wreck than women, and singles are more likely to get into an accident than married persons. These groups have higher average car insurance payments. |
| Financial history | Most states allow insurers to use drivers’ credit scores to determine car insurance premiums. The higher your score, the lower your rates will be. |
| Driving history | If you have a recent collision or traffic violation, it can raise your rates. Insurance companies also tend to offer discounts for being accident-free for a certain period of time. |
| Your vehicle | If you have a vehicle that’s more expensive to repair or that has an especially high value, you’ll pay more to have it covered. |
| Where you live | States set their own requirements for car insurance, so some that mandate higher limits may have more expensive premiums. Also, insurers may charge you more if you live in a densely populated area, as these tend to have higher crime rates and more traffic. |
| Type of coverage | If you just purchase your state’s minimum liability auto insurance, your premiums will be lower than if you have full coverage insurance or add extras like gap insurance or a roadside assistance plan. |
| Amount of coverage | If you elect higher policy limits than your state mandates, you’ll also pay a higher car insurance premium. |
| Continuous coverage | Having continuous coverage looks good to a potential insurance provider. If you’ve had a lapse in coverage, you run the risk of being labeled a high-risk driver and paying more. |
Insurance providers are legally prohibited from including religion or race when determining insurance costs. This is because they are not legitimate measures of risk as outlined by discrimination laws.
Your Insurance Score
All of the factors listed above will be considered when determining your insurance score, which providers use to set premiums. Like your credit score is used to assess how likely you are to default on a payment, insurance scores calculate the likelihood that you’ll file an insurance claim.
Insurance scores range from 200 to 997, and higher scores represent less risk. Those who present the least risk pay the lowest car insurance premiums.
How To Get A Lower Premium
The price of an insurance premium stays constant unless you make a substantial change to your policy, like buying a new car. Rates will also change when you renew auto insurance, as an insurer will reassess your costs for coverage. Traffic violations or an accident will generally cause a premium to go up, but there are ways for a car insurance premium to decrease as well.
Here are a few steps you can take to lower your car insurance premiums:
- Look for insurance discounts: Auto insurance companies offer a variety of discounts for anything from bundling multiple policies to taking a defensive driving course to being a federal employee. If you’re looking for a lower rate on your policy, feel free to call your insurance agent to see if you qualify for any discounts they may not have told you about.
- Pay in full: Another way to save money is by paying your entire premium upfront. Auto insurance is usually bought in six-month or twelve-month periods, and you can typically save some cash by paying in advance.
- Adjust your deductible: Going with a higher deductible can lower your premium, but it means that you pay more out of pocket when filing a claim. If your bank account can handle it when a claim comes up, opting for a higher deductible can potentially save you money in the long run.
- Reassess your coverage: Asking yourself how much car insurance you need can be another gateway to a lower premium. For example, if you’re driving a car that’s 10 years old, valued under $4,000, and has a high mileage reading, you’re likely fine dropping collision and comprehensive coverage. If you’re financing a new car, or you drive one of high value, taking out a policy with high coverage limits could be worth your financial security.
Our Recommended Car Insurance Providers
If you’re looking for the best ways to save on car insurance, taking time to research companies and their coverage options is a great step. Our team of insurance experts recommends State Farm and Geico because they offer competitive prices up front as well as multiple ways to save on insurance. Keep reading to learn more, or check out the tool below to start getting free auto insurance quotes from top companies in your area.
Geico: Best Overall
With an A+ rating from the Better Business Bureau (BBB) and an A++ for financial strength from AM Best, Geico stands out with great customer service and prices that usually fall under its competitors’ rates. Geico has discounts for bundling policies and good driving, along with a well-reviewed app that allows customers to pay their bills, view paperwork, and access roadside assistance if necessary. You can get more information in our Geico auto insurance review.
State Farm: Best For Students
State Farm is the largest car insurance company in the United States, and it’s a great choice for younger drivers. There are a number of discounts for teens and students, such as those for getting good grades, leaving your car at home when you go off to college, or taking driver training courses. Read our State Farm auto insurance review to learn more.
Methodology
In an effort to provide accurate and unbiased information to consumers, our expert review team collects data from dozens of auto insurance providers to formulate rankings of the best insurers. Companies receive a score in each of the following categories, as well as an overall weighted score out of 5.0 stars.
- Industry Standing: Insurers with strong financial ratings and customer-first business practices receive the highest scores in this category.
- Availability: We consider availability by state as well as exclusions for specific groups of drivers.
- Coverage: This rating is based on types of insurance available, maximum coverage limits, and add-on policies.
- Cost and Discounts: Our research team reviews sample quotes for a variety of drivers in every state. Companies with lower prices and many car insurance discount opportunities receive the best scores.
- Customer Service: We comb through customer reviews and consumer feedback studies from experts like J.D. Power.
- Technology: Auto insurers with mobile apps, advanced online services and telematics are more likely to meet consumer needs.
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