What Is a Car Insurance Premium?
Your car insurance premium is the cost of purchasing and maintaining your coverage with your insurance company. Depending on your policy, your premiums will pay for coverage on claims, like car repairs or medical bills after an accident and replacing your car if it's totaled. Premiums are typically paid monthly or every six months and the amount is determined by your deductible, coverages and more.
Keep reading to learn how car premiums work and how to secure the best price for your needs and budget.
What Is a Car Insurance Premium?
Car insurance premiums are the amount you pay your insurance company to receive auto insurance coverage. Insurance companies consider several factors when determining your car insurance premium, including your personal information, claims history, location and the car(s) being insured.
Since premiums can vary by insurance company, we recommend shopping around for the best quote available to you.
How Do Car Insurance Premiums Work?
When you pay car insurance premiums to your auto insurer, you gain coverage against specific incidents, such as damages to your vehicle or medical bills for your passengers' injuries after an accident. Premiums are typically paid monthly, every six months or every 12 months in full. You will need to renew your policy by its effective date to avoid lapses in auto insurance coverage, which could raise rates or get you dropped by the insurer..
The idea behind car insurance is that costs of accidents (on approved claims) are shared among all the policyholders. The costs incurred by the individual are mitigated by the premiums contributed by the many. This explains how you can pay $100 in monthly premiums but gain $15,000 in coverage. Insurance only works (and is profitable to the insurance company), when only a minority of people have accidents.
Average Car Insurance Costs
The average price of car insurance in the U.S. in 2021 is $1,450.92 per year ($120.91 per month). The type of policy can shift the average cost, such as minimum liability only ($730 per year) or full coverage ($2,400 per year).
You can also expect different premiums based on your insurance carrier. Below, we've compiled the most affordable national car insurance companies.
Average Premiums for National Carriers
2. State Farm
3. American Family
How Are Car Insurance Premiums Calculated?
Each insurance company has its own computation system when calculating your auto insurance premium. Generally, insurance companies will consider the following factors:
Insurance carriers will consider your personal information, including your credit history, age, marital status, occupation and sometimes sex/gender. Even with a minimal claims history, teenage drivers are considered riskier than middle-aged drivers with accident-free histories.
A high-risk driver with multiple accidents in their claims history will likely pay higher premiums than a safe driver with an accident-free history for five years. Insurance companies charge higher premiums when they need to offset the risk exposure of an accident-prone driver.
Cars with built-in safety features, such as anti-lock brakes and anti-theft systems, often enjoy safety-related discounts. However, newer models with the latest technology tend to accrue higher repair bills than older models. Insurers will consider these factors when determining your premium.
Increasing your deductible — your out-of-pocket costs for a covered claim — lowers your monthly premium while decreasing your deductible raises it. If you're a safe driver with few to no accidents in your history, then lowering your deductible may be a cost-saving opportunity.
Number of Drivers
Having multiple drivers under an auto insurance policy will raise the premium since more drivers are being covered. Fortunately, many insurance companies offer discounts for opening a multi-car policy.
Low-mileage drivers generally pay less in car insurance than high-mileage drivers. After all, the less time you spend on the road, the less likely you are to experience an accident.
Some insurance companies, like Lemonade, require drivers to opt into their telematics program — location-based technology that analyzes your driving behaviors, such as speeding, braking and driving hours. Safe drivers tend to enjoy lower premiums than drivers that speed and brake abruptly.
Your location can affect your premium since the costs of living and prices for auto-related goods and services vary by state. For example, the average monthly cost for minimum coverage in 2021 is $108.63 in Alabama, $79.54 in Delaware and $134.20 in Florida.
The more add-on coverages listed under your car insurance policy, the higher you'll pay in premiums. We've summarized the most common types of auto insurance below. Note that liability coverage is required in most states; personal injury protection and uninsured driver coverage is required in some states.
Property damage liability
Pays for property damages due to an accident you caused.
Bodily injury liability
Pays for medical bills if you're responsible for the injuries of the other driver in an accident.
Personal injury protection
Covers medical bills belonging to your passengers after an accident.
Provides coverage when the other driver in an accident has zero or insufficient insurance coverage.
Covers damages to your car after suffering an accident, regardless of whoever is at fault.
Covers damages for certain not covered by collision or incidents that occur outside driving (e.g., theft, vandalism, falling objects).
How To Lower Car Insurance Premiums
Some common ways to lower your insurance premium include bundling with another insurance policy, tweaking your coverage to reflect your lifestyle and needs and shopping around for a better quote.
Insurance companies often offer discounts when you open a multi-policy by bundling auto insurance with another insurance product, such as renters or life insurance. Many policyholders enjoy the convenience of using one insurer to protect them from multiple types of perils or incidents.
Adjust Your Coverage
Dropping add-on coverages that no longer serve you could save you money on car insurance. For example, if your car is worth $1,000 and you're paying a $50 monthly premium plus a $500 deductible, then you may want to consider dropping collision coverage. In this case, the savings gained may be worth the loss in an accident.
Several factors can affect car insurance rates, including your driving behaviors, the safety of newer car models and even your age. Whether you're a new or seasoned driver, shopping around can help you compare rates and find affordable quotes based on your needs, budget and driving history.
Quote Vs. Premium vs. Deductible
An estimate of how much you will pay for car insurance before registering.
The actual price you pay for car insurance after your insurance carrier assesses your risk profile.
The amount you pay out-of-pocket on an approved claim before your insurance carrier covers the difference.
Example: Based on the initial information you provided the agent over the phone, you're quoted for a premium of $100 per month
Example: After the agent underwrites your insurance policy based on your qualifications, your premium is calculated a $120 per month
Example: You encounter an accident and need to pay $2,000 in repairs. After you pay a $500 deductible, your insurance carrier covers the remaining $1,500.
An Easier Way To Compare Auto Insurance Quotes
Whether you live in California or Maine, drive once a week or everyday, you need car insurance. To keep your policy active you must pay your premium, whether it's every month, semi-annually or you pay it all upfront for a discount. Without an active car insurance policy, you risk paying for accidents 100% out of pocket — not to mention it's illegal to drive without insurance in most states.
Instead of trying to navigate the countless insurers out there, shop smarter with SmartFinancial's side-by-side comparison charts of 200+ insurance partners. Just enter your zip code below to generate your free auto insurance quotes in minutes.
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