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What is a car insurance premium?

Car insurance premiums work similarly to those in life insurance, disability insurance, and health insurance: In general, the more risk you pose, the higher your premiums will be.

When you purchase car insurance, you’re paying for the protection from financial liability when you cause an accident. Car insurance can also reimburse you for property damage to your car and some medical expenses. To keep this protection, you pay premiums each policy period your car insurance is in force.

Your car insurance premiums work similarly to those you pay for life insurance, disability insurance, and health insurance. In general, the more risk you pose, the higher your premiums will be. According to the most recent data from the National Association of Insurance Commissioners (NAIC), the average annual car insurance premium is $889. For people who purchase all three of the major types of car insurance – liability insurance and collision and comprehensive insurance – the average annual premium is $1,009.

Forty-eight states and the District of Columbia require you to have car insurance before you get behind the wheel. (New Hampshire and Virginia don’t require you to purchase car insurance, but you need to be able to pay for claims out of pocket.)

Your car insurance premiums are determined by a number of factors that you can’t control, such as your age, or which are difficult to improve, such as where you live. But your premiums could be readjusted every policy period to account for changes in your life, and they frequently decrease as you gain more experience as a driver and demonstrate a history of safe driving.

Additionally, if you feel like you could get a better rate, you can also shop around for a new car insurance policy that fits your financial plan.

Read on to learn more about:

How premiums are calculated

Car insurance premiums are calculated by a lot of factors, some of which have to do with your personal characteristics, and others which have to do with the amount of car insurance you need, the type of car you drive, and the insurer’s own guidelines for underwriting.

Coverage amounts

Every state that requires you to have car insurance mandates a minimum amount you need to have in each type of car insurance. However, these amounts are low in comparison to the actual costs you could incur if you’re liable for an accident or need to repair or replace your car.

For that reason, you need to purchase as much car insurance as you need in liability coverage, collision and comprehensive coverage, and personal injury protection to make up for any costs you wouldn’t be able to afford out of pocket. The more coverage you purchase, the higher your premiums will be; adding collision and comp could be especially expensive.

Calculate how much car insurance you need before applying to make sure you’re getting quotes that accurately reflect what you can afford. A licensed representative from Policygenius can help you figure out if you need more coverage in one type of car insurance than another and select a range of quotes for you to approve.

Note that the coverage amounts you purchase represent the limits of your car insurance. For example, if you have $75,000 in liability coverage, and you cause $100,000 in damage, you’ll be stuck paying for the remaining $25,000 out of pocket. Your coverage limits are listed on your policy declarations sheet.

Your driving history

The car insurance company will want to assess how much risk you pose that you might cause an accident. If you have a longer driving history, you’re likely to pay lower premiums if you’ve been a safe driver all that time.

But if you’re less experienced, if your driving history is relatively checkered by moving violations or accidents, or if the insurer has otherwise deemed you a high-risk driver, then you’ll pay higher premiums. High-risk drivers may have trouble finding car insurance coverage at all.

Your age, gender, and location

Younger people will have to pay more for car insurance than older people. That’s because car insurance believes younger drivers are not only less experienced but also more likely to take risks while driving. (Car insurance premiums start dropping significantly around age 25.)

Your gender also affects how much you’ll pay. Men are considered higher risk than people of other genders, according to the statistics compiled by the car insurance companies, so they’ll pay more for car insurance.

Finally, if you live in a place with higher rates of crime, you will have to pay higher premiums. That’s because of the higher risk that your car could be vandalized or stolen.

Your car

Because more expensive cars are difficult to repair, they’re also more difficult to insure. Some car insurers also charge higher rates because they have observed that people with flashier cars may drive more recklessly. You’ll pay lower premiums if you opted for the beater instead of the Beemer.

If your car comes installed with any safety features, you’ll get a discount on your premiums. You probably already have airbags and seat belts, but insurers will add discounts for other safety features.

How often you drive

If you don’t drive your car, it’s impossible to get into any accidents with it. Since your risk goes up the moment you get behind the wheel, car insurance companies may quote you a lower premium if you drive less. Car insurance companies will look at how many miles you drove every time your policy is up for a renewal.

Discounts

In addition to discounts for adding safety features, you can get a discount for being a safe driver, having good grades (if you’re still a student), and for bundling your car insurance policy with your homeowners or renters insurance policy when you buy from the same insurer.

Your credit score

Auto insurance companies have a formula that combines your credit score with your insurance history and calculates your risk based on the result. A higher insurance score means lower premiums.

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Takeaway

Car insurance premiums work similarly to those in life insurance, disability insurance, and health insurance: In general, the more risk you pose, the higher your premiums will be.

What can affect your premiums

Your policy is up for renewal at the end of every policy period, which is usually six months or one year. At that time, the insurer will look at your driving history over the course of the policy period and decide to raise or lower your rates.

What increases your premium

During the policy period, if you file a lot of claims or a lot of claims are filed against you, you’ll likely see a rate increase at your next renewal. Being liable for even one car accident will definitely increase your rates, especially if you cause serious damages or injuries. Any traffic violations you’ve accrued on your driving record, like speeding, will also cause an increase in your rates.

You’ll also see a slight uptick in rates as you approach your mid-60s, and by your late 60s and early 70s your rates could increase dramatically.

If your policy lapses, you aren’t legally allowed to drive, unless you’re insured by someone else’s coverage. But if you have no coverage, then by the time you purchase car insurance again, your rates may be higher than someone who has had continuous coverage.

What decreases your premiums

Gaining more experience on the road will mean a decrease in your premiums if you’ve shown that you’re a safe driver. While car insurance premiums start out very high when you’re a teenager, after about 10 years of driving your rates will start to go down.

You may also apply for discounts that you weren’t able to get when you purchased the policy. If you added new safety features, like a forward-collision warning system, blind spot detection, adaptive headlights, or security measures like an anti-theft system, then you should let the insurer know, and they’ll likely lower your premiums.

If your credit score or your grades have improved over the last policy period, you should be able to get further discounts.

You’re under no obligation to stick with the same auto insurance company when you renew your policy. In fact, shopping around and getting quotes from many different car insurance companies can help you fine-tune the coverage you need at an amount you can afford.

Usage-based car insurance

Usage-based insurance is a newer option offered by auto insurance companies that adjusts your premiums based on how you actually drive, as opposed to how people in your statistical demographic group are likely to drive. Usage-based car insurance comes in two main forms:

  • Pay-as-you-go car insurance, which adjusts your rate based your mileage that policy period, but still takes your motor vehicle record into account.
  • Pay-how-you-go car insurance, which adjusts your rate both on how safely you drove that policy and your mileage.

What is the average premium in each state?

According to the most recent rates from the NAIC’s Auto Insurance Database Report, there is a huge variance between premium rates in each state, with drivers in New Jersey paying nearly twice as much for a policy containing all three coverages than someone in North Dakota. Louisiana has the highest combined premiums on average; Idaho has the lowest.

The average cost of car insurance liability cost is $538.73 nationwide. To add collision and comprehensive coverage will cost an additional $322.61 and $148.04, respectively, on average.

Premiums, deductibles, and quotes

When you first apply for car insurance, you’ll be given a quote, which is an estimation of what your premiums will cost when the coverage is official. The quote may go up or down during underwriting, the process during which the carrier looks at all the factors affecting your premiums and makes a final determination based on the information it has received about you.

Your premiums could be affected by the amount of deductible you elect to pay. Your deductible is the amount you have to pay out of pocket to settle a claim before the insurer pays the remainder. (If you file a claim for $5,000 in damage and you have a $1,000 deductible, the insurer is only obligated to pay $4,000 toward the claim.)

Of the major types of car insurance coverage contained in your overall policy, only your personal property damage coverage – collision and comprehensive insurance – has a deductible. By opting for a higher deductible, thus reducing the car insurance company’s financial burden, you’ll pay lower premiums.

How to pay your car insurance premiums

Depending on the insurer, you may have many options to pay your premiums, such as:

  • Automatic charge to your credit or debit card
  • One-time charge to your credit or debit card
  • Bank account withdrawal, which may result in a small discount
  • At your insurer’s local offices
  • By mailing a check

You may be able to pay on the insurer’s website, through the insurer’s app, or even over the phone.

Most insurers require you to pay for your entire policy period upfront, and usually charge a fee for the ability to pay month by month. (Others may frame this as a paid-in-full discount.)

Since you’re only submitting your information at the beginning of the policy period, your premiums will be the same on a per-month basis whether you pay for a six-month policy period or a 12-month period. For that reason, it’s sometimes beneficial to pay for the 12-month policy period to lock in your rates for an additional six months.

What happens if you don’t pay your insurance premiums?

If you don’t pay your insurance premiums, your policy will lapse. For car insurance, that means it could be illegal to continue driving the car. Being caught driving without insurance coverage could mean thousands of dollars in fines.

A policy cancellation can even lead to your license being suspended if you live in a state that reports this information to your local department of motor vehicles.

Not having continuous coverage could also mean higher premiums when you apply for car insurance again.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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