What is a car insurance premium?

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Car insurance protects your liabilities as a driver and covers damages to your vehicle after an accident. Your insurance company promises to pay for the repairs after a covered loss in exchange for a monthly fee, called a premium. Every driver who has car insurance pays a premium, but there are several different types and the cost varies based on a number of factors. Keep reading to learn more about car insurance premiums.

What is a car insurance premium?

A car insurance premium is the annual cost of your car insurance policy. Most drivers choose to pay their premium in monthly installments over 12 months, but other drivers pay their annual premium every six months or once per year. A car insurance premium is sometimes called an insurance rate.

The reason drivers pay a premium for their car insurance is to keep their policy in force. As long as you continue paying the monthly premium, your insurance company promises to protect you and your vehicle in the event of an accident or other covered loss. When you stop paying the premium, the insurance company has the right to cancel your policy after a certain period of time.

When you are shopping for car insurance, you may come across another cost called a deductible. Your premium and your deductible are two separate fees. You are only required to pay the deductible when you file a covered claim. It is an out-of-pocket fee that you must pay before your insurance company will reimburse you for the remaining cost of repairs.

What are the types of car insurance premiums?

Technically, there is only one type of car insurance premium. However, most insurance companies allow drivers to choose how frequently they pay their premium. The most common options are to pay monthly, annually or bi-annually. How often you pay is a personal choice based on your budget and other factors.

Keep in mind that the payment schedule you choose could have an impact on your rate. Drivers who pay their annual premium in full usually qualify for a small discount. If you pay monthly, the upfront cost is smaller, but there could be added processing fees.

How are car insurance premiums calculated?

Car insurance premiums are highly personalized. There are a number of factors that insurance companies use to calculate your unique rate. Some of these factors you can control and others you cannot. Here are some of the things that impact your car insurance premium:

Your age and state

How old you are and where you live are two of the biggest factors that impact your car insurance premium. Younger drivers, particularly teenagers, pay the highest premiums for car insurance because they have the least on-road experience. Car insurance rates also vary significantly by state. States that get hit with extreme weather, have a large number of uninsured drivers or have high accident rates are likely to have the highest premiums.

Your credit score

Your credit score is very important when applying for a car insurance quote. Insurance companies consider drivers with poor credit to be high risk, meaning they are more likely to get into an accident or file a claim. However, four states — California, Hawaii, Massachusetts and Michigan — prohibit insurance companies from using credit scores to calculate rates. Nevertheless, improving your credit score is one of the most effective ways to get a lower premium.

Your driving record and claims history

Insurance companies look at your driving record and your claims history when determining your policy rate. If you have any traffic violations on your record, it indicates that you are a risky driver. As a result, the insurance company charges more for coverage. The same goes for insurance claims. Filing one insurance claim means you are more likely to file another one in the future. Increasing your insurance rate is the insurance company’s way of mitigating their risk and preparing for additional claims moving forward.

Your vehicle

Certain cars are more expensive to insure than others. For example, insurance on a brand new car or a luxury SUV is going to be much pricier than insurance on a 10-year-old used car. High value cars are more expensive to fix if something breaks or if you get into an accident. If your car gets totaled or stolen, the insurance company has to compensate you based on the car’s current value. The higher the car’s value, the higher your insurance premium will be.

How to save on car insurance premiums

Although car insurance can be expensive, there are many ways that you can lower your premium. Here are some options for getting a cheaper car insurance rate:

Apply discounts

Almost every insurance company offers discounts that can lower your premium. Some discounts are more significant than others. When you are shopping for car insurance, pay attention to the discounts that each provider offers. Common discounts include being a good student, being claims-free, taking a defensive driving course, having an anti-theft system in your car and bundling your insurance policies.

Pay your premium in full

As mentioned, paying the annual cost of your premium in full can help you get a lower rate, if you can afford the upfront cost. Most insurance companies offer this discount, even if it is not advertised. The exact savings vary by insurance company, but it is typically somewhere between 5-15%. If your insurance rate is very expensive, even a discount of 5% could be worth it.

Check your coverage

The more coverage you have, the higher your insurance premium will be. Although it is enticing when your insurance provider offers optional coverage, like glass repair or roadside assistance, choose carefully because the price of those coverages can add up. Only pay for the coverages that you actually need, and check for duplicate coverage. For instance, you might already have roadside assistance through your credit card provider.

Frequently asked questions

What is the best car insurance company?

The best car insurance company is different for every driver. It depends on what you need and what you value. For instance, the best car insurance company for customer service might not be the best provider for cheap rates. Considering your personal needs and comparing providers is the only way to find the right insurance company for you.

Can you pay your car insurance premium online?

Yes, most car insurance companies allow drivers to pay their premium online. Almost every national insurance provider has this option, but small local insurance companies might not. If you can pay your premium online, you can likely use a credit card or bank transfer. Most companies also have an option for automatic bill pay.

What is the average car insurance premium?

In the United States, the average car insurance premium is $1,004 per year, which is about $500 bi-annually and $83 monthly. However, every driver pays a slightly different rate based on factors like their state, age, credit score, claims-history and more.

Written by
Elizabeth Rivelli
Insurance Contributor
Elizabeth has two years of experience writing for insurance domains such as Bankrate.com, The Simple Dollar, Coverage.com and NextAdvisor, among others. In addition to auto insurance, Elizabeth regularly writes about home insurance, renters insurance and life insurance. She also covers industry trends and general insurance education.