A car insurance premium is the money you pay to the insurance company in return for providing insurance coverage for your vehicle. Your insurance premiums are paid on a regular basis, and are often paid in monthly or quarterly installments or once per year as an annual premium. The average cost of insurance is $1,771 per year for a full coverage policy, but insurance premiums will vary by driver, sometimes significantly, due to a wide range of personal factors.
Each car insurance company also calculates rates differently, so rates can also vary based on the companies you get quotes from. In general, though, car insurance rates are calculated based on a few different factors, including the coverage options you select, your ZIP code, your driving history, the vehicle make and model, and, in some states, your age, gender and credit score. This makes your insurance premium unique to you, and means that your insurance premiums can change over time.
What is a car insurance premium?
A car insurance premium is the annual cost of your auto insurance policy and is sometimes called an insurance rate. Most auto carriers offer six-month policies, but some offer an annual policy. You can pay it all at once or monthly, which may come with additional installment fees.
The reason drivers pay a premium for their car insurance is to keep their policy in force. As long as you continue paying the auto insurance premiums on time, 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 insurer has the right to cancel your policy after a certain period. If the policy is canceled, you will not have auto insurance coverage if you have an accident.
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. An out-of-pocket fee will be deducted from the amount your insurance company pays to cover the claim. You will be responsible for any remaining costs that exceed the amount the insurance company pays.
What options do I have with my car insurance premium?
You have several options with your car insurance premium. You can pay it in full or in installments, usually monthly, quarterly or semi-annual, depending on the length of the policy term. You typically get the best deal on insurance costs when you pay in full and avoid installment and processing fees.
Discounts are a great way to get cheaper auto insurance premiums. Each company has its own set of discounts offered, and many can be stacked together for additional savings. There are discounts specific to students and young drivers, considered high-risk drivers compared to other age groups and generally more expensive to insure. You can check with each insurer to find out which discounts it offers.
How are car insurance premiums calculated?
Car insurance premiums are highly personalized. There are a number of factors that providers 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 costs also vary significantly by state. Each state’s Department of Insurance determines how individual factors can be used when determining auto insurance premiums. In states other than CA and MI, ZIP codes also matter. If your ZIP code sees more extreme weather, a large number of uninsured drivers or high accident rates, your insurance costs may be higher than other ZIP codes in your state.
Your credit score
Your credit-based insurance 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. Four states — California, Hawaii, Massachusetts and Michigan — currently prohibit the use of credit scores as a rating factor for car insurance, and Washington state is also working to ban credit as a rating factor. Nevertheless, improving your credit score may help you get a lower premium in many states.
Your driving record and claims history
Insurers 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.
Certain cars are more expensive to insure than others. For example, insurance on a brand new car or a luxury SUV can 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:
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, participating in a telematics program, 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 auto insurance coverage you have, the higher your insurance premium can be. The type of coverage you choose also impacts your insurance costs. Most states require a minimum amount of liability coverage. You may also add comprehensive coverage and collision coverage, which provides physical damage coverage to your car if it’s damaged or totaled in a covered claim. 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.