What Is a Car Insurance Premium?
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A car insurance premium is the amount of money you pay to your insurance company in order to receive the coverage outlined in your policy. Also called an insurance rate, your premium is basically the cost of purchasing and maintaining insurance. As long as you continue to pay your premium, your insurance company will pay out claims for medical bills, car repairs and more, depending on the scope of your policy.
Keep reading for more information on how car insurance premiums work and how you can secure the best price for your needs and budget.
How Do Car Insurance Premiums Work?
Paying your car insurance premium ensures that your insurance company will pay for covered losses. You must continue to pay your premium even if you don’t get into a car accident during the coverage period. Doing so provides a safety net in case you ever do get in an accident since it can keep you from having to pay for another person’s medical or repair bills entirely out of pocket.
The costs of approved claims are shared among all policyholders. This is why you could pay a $100 monthly premium and receive $15,000 worth of coverage in return. Auto insurance works (and is profitable for the insurance company) when only a small portion of policyholders actually get in accidents and need to make claims on their insurance.
How Long Is a Premium for Car Insurance?
Most car insurance policies last six months, but some insurance companies offer 12-month policies.
Paying in monthly installments is a tempting option since it prevents you from having to give up a large sum of money all at once. However, there are often discounts available if you can afford to pay the full six-month or annual premium up front.
Average Rates for Car Insurance Premiums
The average car insurance premium in 2020 was $1,176.18 a year for a full coverage policy including liability, comprehensive and collision coverage. Drivers in Maine had the lowest average rate of $788.84, while Louisiana had the highest average rate of $1,684.86.
Keep in mind that full coverage is often the minimum you will have to buy if you are financing or leasing your car. As a result, your premium could exceed the national average if you add other coverage types to your policy.
Why Do Car Insurance Premiums Change?
Your car insurance premium may change when you renew your policy at the end of your coverage period because your insurance company adjusts your premiums to reflect your current risk profile. For example, if you get into an accident and file an insurance claim for the first time, then your insurer may raise your rate for the next coverage period since they would now consider you more likely to file another claim.
In addition, other life changes can impact the cost of your premium. For example, your premium will likely go up when your child turns 16 and you add them to your policy, but it could go down if you sell your new car and purchase a used car instead. Auto insurance rates can also fluctuate due to factors completely outside of your control, such as inflation.
How Is My Car Insurance Premium Calculated?
Car insurance rates are highly personalized, meaning insurance companies calculate the risk of insuring each given individual. As a result, insurance premiums vary from person to person and from company to company. Below are some of the factors that will most commonly influence your car insurance rates.
Personal characteristics like age and sometimes gender play a part in determining your insurance rates. For example, an inexperienced teenage driver will likely have a higher premium than a middle-aged driver, since the teenager would be more likely to cause an accident. In addition, men tend to pay slightly higher rates than women because they are statistically more prone to costly accidents.
Some insurance companies will even evaluate the likelihood that you will file a claim using a credit-based insurance score, although this is prohibited or otherwise regulated in California, Hawaii, Maryland and Massachusetts. No insurance company is allowed to change your premium based on a protected status like your race or religion.
Insurance companies will often look at your driving history to see how likely you are to file a claim. A high-risk driver who has been responsible for multiple accidents in the past few years will naturally have to pay a higher premium than someone who has never been in an accident.
Other driving behaviors may also influence your rates. For example, a low-mileage driver who works from home and rarely has to drive will likely pay less than someone who has to drive frequently as part of their job. In addition, some insurers will use telematics data, or technologically collected information about your driving habits, to determine the cost of your premium. For example, someone who is prone to speeding may have to pay a higher premium than a comparatively safe driver.
Age and Model of Your Car
Your insurance rates will also depend on the car you are insuring. Insurance companies generally pay out total losses at the car’s actual cash value, or its replacement cost minus depreciation factors like age or wear and tear. As a result, the older and less valuable your car is, the lower your premium should be.
A newer car may have built-in safety systems that could lead to discounted rates. At the same time, models with the most up-to-date technology may require higher repair bills in the event of an accident and are more likely to be totaled as a result. Your insurance company will take all of these factors into account when calculating your insurance premium.
Deductible and Limits
The deductible is the amount of money you agree to pay out of pocket before your insurance company will start chipping in toward covered losses. You choose your deductible when buying your policy. Selecting a higher deductible means that your insurance company will be responsible for fewer costs whenever you get into an accident. As a result, a higher deductible will typically correspond with a lower premium.
Meanwhile, the limit is the maximum amount of money that your insurance company will pay toward a covered loss. For example, if you have a policy with a $25,000 limit for property damage liability coverage and you cause an accident that results in $30,000 worth of damage, then you would have to pay your deductible plus the last $5,000 out of pocket.
The higher your limits are, the more money your insurer will be responsible for paying in the event of an accident. So, while raising your limits will provide you with better coverage, it will also require you to pay higher premiums.
Number of Drivers
If your insurance company is covering multiple drivers under one policy, the premium for that policy will naturally be higher than for a policy covering only one person. Even so, many insurance companies offer discounts on multi-car policies.
Your location can impact your auto insurance rate in many ways. Each state has its own laws about how much car insurance you need and what methods insurance companies can use to calculate premiums. Furthermore, location-related information like cost of living and auto repair prices may impact your rate as well.
In general, people who live in urban areas will pay higher rates than drivers from rural areas because they are more prone to theft and car accidents. You may also have to pay higher premiums if you live in a ZIP code with extreme weather or several uninsured drivers.
While there are multiple types of car insurance, not all of them are required in every state. The more coverage included under your policy, the higher your premium will be.
However, depending on the state you live in, you may be able to exclude other common coverage types, such as uninsured and underinsured motorist coverage, personal injury protection, medical payments coverage and gap insurance.
Car Insurance Premium vs. Deductible vs. Quote
While they are different from premiums, quotes and deductibles are still relevant for understanding the amount of money you will have to pay for auto insurance. In general, you will receive a quote before receiving your premium, while your deductible would come into play after you start paying your premium and get into an accident.
Estimate of how much your car insurance premium will cost
Your actual premium after the insurance company has assessed your risk profile
Amount you pay out of pocket for covered losses before your insurance company will contribute any money
You insert preliminary personal information into an online car insurance calculator and are given an estimated rate of $100 a month
An insurance underwriter fully examines your personal information and calculates that you should pay $120 a month for your auto insurance
You cause $2,000 worth of damage to someone else’s car and then pay a $500 deductible, after which your insurance company covers the remaining $1,500
How Can I Lower My Car Insurance Premium?
Finding a lower car insurance premium is often possible by shopping around or tweaking your coverage. Since insurance premiums are so personalized and calculation methods are company-specific, car insurance rates from two different insurers will rarely be identical.
- Bundle your insurance policies: Many insurance companies offer discounted rates when you open a multi-policy that bundles your car insurance with another one of their insurance products. For example, if you bundle your auto, life and homeowners insurance together, you may pay less than you would have to if you purchased each insurance policy separately.
- Drop optional coverages: For example, it is recommended that you drop comprehensive and collision coverage if their combined premiums add up to more than 10 times the value of your car. Based on the average rates from 2020, dropping comprehensive and collision coverage in favor of a liability-exclusive car insurance policy could save you around $545 a year.
- Shop around: Different insurers weigh certain factors more heavily than others when determining insurance premiums, meaning it’s important to shop around to find the best rate for your specific circumstances. You can compare auto insurance rates for free using an online insurance marketplace like SmartFinancial.
What Happens if I Don’t Pay My Car Insurance Premium?
If you fail to pay your car insurance premium or don’t renew your policy, you will experience a lapse in coverage. This means you will be temporarily uninsured until you make your next premium payment.
In addition, you run the risk of being caught driving without car insurance, which is illegal in almost every state.