What is a car insurance premium?
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Your car insurance premium is money you pay to your insurance company in exchange for a policy. Car insurance premiums generally follow the same principles across carriers but may vary in 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 to help you better understand what you’re paying your insurance company and why.
What is my car insurance premium?
The national average premium for a full coverage car insurance policy in 2023 is $2,014 per year, according to Bankrate’s study of average rates from Quadrant Information Services. The minimum coverage average is $622 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 a year, depending on the policy length options your company offers, but you can typically pay your premium quarterly or monthly rather than as a lump sum.
An insurance premium is what keeps your policy in force. As long as you continue paying the auto insurance premiums on time and meet the terms of your policy, your insurance company ensures financial protection for you and your vehicle in the event of a covered loss. If 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, which may leave you with a lapse of coverage if you don’t secure other coverage beforehand.
When do you pay an auto 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 usually pay your premium 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 you might want 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 insurance 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, and these vary based on state laws. Some of these factors you can control, and others you cannot. Here are some of the things that impact your car insurance premium:
Your location
Your location is one of the biggest factors that impacts your car insurance premiums. Average rates vary greatly by state based on each state’s minimum insurance requirements, driver demographics and risk factors, like weather patterns and accident rates. Even within a state, your rates may vary based on your specific location. For example, drivers in large cities usually see higher insurance rates as there is typically more traffic congestion, more accidents and higher crime rates compared to more rural areas.
Your personal characteristics
Many individual factors affect your car insurance premium, but these may vary based on your state. In most states, your age, gender and credit history impact your car insurance premium. Generally speaking, younger drivers tend to pay higher premiums than older drivers because they have less experience on the road. Male drivers tend to pay more for car insurance than female drivers. In addition, drivers with poor credit history typically pay higher rates than those with good or excellent credit.
Your driving record and claims history
Insurers look at your driving record and your claims history when determining your policy rate. Accidents, speeding tickets and many claims may indicate to carriers that you are a risky driver. As a result, you may be charged more for coverage. However, insurance companies typically only consider accidents and tickets for three to five years, so you may see rates level out again if you continue to practice safe driving habits.
Your vehicle
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 generally more expensive to fix if they are damaged 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.
Your coverage selections
How much auto insurance coverage you carry will impact your premium. Generally speaking, more coverage types and higher coverage limits will result in a higher premium. Choosing just your state’s minimum coverage requirements will typically result in the cheapest premium but may not offer enough financial protection in the event of an accident or other covered incident. Adding full coverage, including comprehensive and collision insurance, adds coverage for your own vehicle. Other common add-ons include roadside assistance coverage, gap insurance and new vehicle replacement.
Other drivers on your policy
Adding one or more drivers to your car insurance policy will impact your rates. This is because insurers assess the overall likelihood of accidents and claims, including the individual risk level of all listed drivers. The additional driver or drivers’ driving history and other personal rating factors will be considered during underwriting.
For example, adding a young driver to an adult driver’s insurance policy typically increases the rate for the policy, as having a teen driver on a policy increases the statistical risk that the vehicle will be in an accident.
How to save on car insurance premiums
Although car insurance can be expensive, there are many ways that you may be able to lower your rate. Here are some potential options for getting a cheaper car insurance premium:
Shop around and compare quotes
Since the price of car insurance varies by insurer and each company has its own proprietary rating algorithm, your premium may vary greatly depending on the company you choose. To find the cheapest company for your specific circumstances, you may want to compare quotes across various carriers. Most insurance professionals recommend comparing quotes for the same coverage types and limits across carriers to get the most accurate comparison.
Apply discounts
Almost every insurance company offers discounts that might lower your premium. Some discounts are more significant than others. You may want to review the discounts each carrier offers when comparing quotes. Discounts are commonly available for being a good student, remaining claims-free, driving a car with strong safety ratings and bundling your insurance policies. You may also qualify for a discount if you pay your premium in full, enroll in paperless billing or set up autopay.
Check your coverage
There are many different types of car insurance coverage, and the more you have, the higher your insurance premium typically is. Higher coverage limits also typically increase your premium. If price is a concern, you may want to review your policy to ensure you’re only paying 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.
Frequently asked questions
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The best car insurance company varies for each driver. If you want to find the best car insurance company for you, it may be helpful to determine the factors that are most important to you as a driver. Some drivers are looking for the cheapest rates, while others may want a company that offers a strong customer service track record or one with sophisticated digital tools, such as a user-friendly mobile app and online services. Once you determine what matters most to you with your car insurance policy, you can request quotes from the companies that meet your unique needs.
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Your car insurance premium can go up at different times for different reasons. Insurance premium increases during your policy period are usually due to policy changes, like adding a vehicle or adjusting your coverage.
Your premium can also increase at your renewal, which can be due to a change in your driving record or simply company-wide adjustments based on the insurance market. For instance, if you receive a speeding ticket in the middle of your policy term, the surcharge associated with the ticket is typically added to your upcoming renewal rather than immediately. Additionally, many drivers may find that auto insurance rates have increased in 2023 due to no fault of their own — inflation can significantly impact how much you pay for car insurance. These company-driven rate changes also take place at your renewal.
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Car insurance companies charge you a premium based on your risk of filing a claim. The more likely you are to file a claim, the higher your insurance premium will typically be. You may see high insurance premiums if you or another driver in your household has high-risk rating factors, such as teen drivers, poor credit history, accidents, tickets or luxury vehicles. Speaking with your insurance agent may help you identify why your premium is so high and what you can do to lower your insurance rates.
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A car insurance quote and a car insurance premium may be similar, but they aren’t the same thing. A quote is the amount of money a car insurance company predicts it will charge for a policy, and it’s based on the coverage package you select and the information you give during the application process. Quotes are generally accurate, but the projected price may change once the company checks your driving record. For this reason, it’s essential to be forthright when answering questions about your driving record to get the most accurate quote.
On the other hand, a premium is the money you pay to your insurance company in exchange for coverage.
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