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Whether you are purchasing your first policy or paying for your renewal, you might wonder, “What is an insurance premium?” Simply put, a car insurance premium is money you pay to your insurance company in exchange for a policy. Car insurance premiums have many facets, including how often you pay them, how companies calculate them and how your premium may change over time. Bankrate’s insurance editorial team breaks down everything you need to know about your car insurance premium so you can better understand what you’re paying your insurance company and why.
What is a car insurance premium?
The national average premium for a full coverage policy in 2022 is $1,771 per year. For minimum coverage, it is $545 per year. A car insurance premium is the cost of your auto insurance policy and is sometimes called an insurance rate. Your total premium amount may cover you for six months or annually, depending on the policy length your company offers.
An insurance premium is what keeps your 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 case 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. Once your car insurance company cancels your policy, your coverage terminates, putting you in a lapse of coverage.
How often do you pay a car insurance premium?
How often do you pay for car insurance? It depends. When it comes to payment plans, your company probably has several options. 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 rate on insurance when you pay in full and avoid installment and processing fees.
There are a few things to consider before choosing a payment plan. Although you may save money by paying your premium in full, you may want to consider installments if this lump sum will cause you financial hardship. Most companies will allow you to change your payment plan in the middle of your policy term, too. Perhaps you’d like to start your policy on a monthly payment plan, but later on find that paying in full makes more sense. If you have specific questions regarding your payment plan options, you may find it helpful to contact your agent.
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 in most states. 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. 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 an 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.
The make and model of your car has a significant impact on the amount of your car insurance premium. 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 would have to compensate you based on the car’s current value. Generally, 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 to 15%. If your insurance rate is very expensive, even a discount of 5% could be worthwhile.
Check your coverage
There are many different types of car insurance coverage, and the more 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 coverage types that you need and check for duplicate coverage. For instance, you might already have roadside assistance through your credit card provider.