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.

In insurance, a premium is the amount you pay to keep the insurance policy in force. Premiums are paid usually monthly or annually and the amount you have to pay, called the rate, is calculated using a variety of different factors.

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. You can expect to pay about $889 per year on average for coverage and, unless you live in New Hampshire or Virginia, you’re required to have car insurance if you drive.

Much of that risk comes from factors you can’t control, such as your age, or which are difficult to improve, such as where you live. But premiums are constantly readjusted by your car insurance company, so it’s also likely that your rate will occasionally go down. You can even be proactive about it, as certain actions you take could result in a lower premium rate.

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

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What factors determine my car insurance premium?

The foremost thing that determines how high your rates will be is how much coverage you need. Each state has a minimum coverage amount, but those amounts are rather low in comparison to the actual costs you could incur if your car gets damaged or cause someone else’s car to be. We’ll get into coverage needs in the next section, but one part to consider is your deductible, the amount you’ll have to pay out-of-pocket on a claim before your insurance benefits kick in and pay the rest. Your premium could increase by a large amount if you choose a lower deductible, but we actually recommend going with a high deductible because the amount you save in premiums will almost certainly exceed the deductible if you get in an accident.

Because your premium rate is calculated as a measure of the risk you pose to the car insurance company, you’ll likely pay a lower premium for posing less risk. What constitutes risk is tricky and can seem unfair or even discriminatory. For example, the following intrinsic characteristics will affect your premium:

  • Age. If you’re younger, such as when first start driving, you’ll pay higher premiums than someone who is older. That’s because car insurance companies have calculated that younger people, especially teenagers, get into more car accidents than experienced drivers. For that same reason, after age 25, you might start noticing a drop in your premiums, which, all things being equal, you should enjoy until age 65, when your rates start going up again.

However, your age itself isn’t what car insurance companies are looking for: it’s your driving experience. If at age 25 you’ve only been driving a short time, you probably won’t be quoted a lower premium than someone who’s been driving for 10 years.

  • Gender. Look, only one gender has started virtually every war in history, crashed the global economy on multiple occasions, and almost irreversibly polluted the atmosphere with carbon dioxide emissions. It’s safe to assume that people of this gender (hint: it’s men) are also worse drivers than people of other genders. Car insurance companies agree, and they have the statistics to back it up. If you’re male, you’ll probably pay a slightly higher premium on your car insurance.

  • Marital status. Car insurance companies also have the statistics to back this up: people who are married tend to get into fewer accidents. Being married may lower your premiums.

  • Where you live. If you live in a neighborhood with higher rates of crime, you could be assessed a higher premium because your car is more likely to be stolen or damaged.

  • Your credit score. A credit score is a three-digit numerical representation of the risk you pose to lenders that you’ll default on your loans, which is based on factors like your ability to pay your bills on time and how much debt you incur. Car insurance companies take this score and combine it with your insurance history to determine their own insurance score for you. If you have a high credit score, you’ll probably have lower premiums.

Beyond personal information, car insurance premiums are also influenced by how you drive. Obviously, the safer you drive, the less risk you pose. The carrier will look at factors like

  • Your driving record. You can’t expect to get into car accidents, or acquire moving violations or driving-under-the-influence charges, or otherwise rack up a substandard driving record, and pay low premiums. Your premium will probably – but not definitely, contrary to popular belief – go up if you’re involved in an accident or get caught breaking the law.

  • Your car. Because more expensive cars are more difficult to repair, cost is a factor your premium rate. You’ll pay lower premiums if you opted for the beater instead of the Beemer.

  • Your car’s features. Having extra safety features on your car can potentially lower your car insurance rates. You probably already have the basic necessities like airbags and seat belts, but you should also look into forward-collision warning, blind-spot detection, adaptive headlights, plus any security measures like an anti-theft system. The less likely your car will be stolen, the lower your premiums.

  • 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.

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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.

How much coverage do I need?

Car insurance is protection from the financial risk of causing an accident with your car. How much coverage you need is largely a matter of how much you can afford to shell out if, for example, you total your car or someone else’s, or injure or kill a person while driving. If you can’t afford to pay much – think replacing someone’s entire car or wrongful death penalties – you need more coverage.

Because virtually every state requires you to have car insurance, these states have set required minimum coverage amounts that each driver must have. But minimum coverage is simply not high enough to cover really serious damage, especially when combined with a high-deductible policy. Most of the required minimums fall between $25,000 and $50,000, with some outliers, and you’ll pay any amount on a claim that exceeds your coverage.

In fact, car insurance is broken down into distinct categories, and the amount of coverage you need may be different for each category of protection within the larger umbrella of car insurance. You can choose to spend more for coverage in one category than another.

Those categories are:

  • Liability insurance, which includes bodily injury (or BIL) and property damage you cause to another person.
  • Personal injury protection, which covers bodily injury you cause to yourself or your passengers. Also known as PIP.
  • Collision insurance, which covers your vehicle in the event of a collision.
  • Comprehensive insurance, which covers your vehicle when it’s damaged because of a non-collision event or is vandalized.
  • Underinsured and uninsured motorist insurance, which covers you when you suffer injury or damage caused by someone who doesn’t have car insurance or doesn’t have enough to make up for your financial loss.

Not every state that requires you to buy car insurance also requires you to be covered under each category, and the more coverage you purchase in each category, the higher your premiums will be. In addition, there is optional car insurance such as gap insurance, which will pay the difference between your car’s value and what you still owe on your auto loan if your car gets destroyed or stolen.

You can figure out how much coverage your state requires here. (We also have a guide to the average rates per state, including the most expensive and least expensive states to insure a car.) Once you know that, decide how much you need, which should include a deductible you’re willing to pay in the event of a claim.

You should spend the most on bodily injury and property damage liability and less in personal injury protection. That’s because your health insurance or disability insurance should pick up the tab on injuries you incur, but won’t cover those incurred by someone else. Consider how much it’ll cost to fix someone’s car or pay their medical bills. Although you’ll pay higher premiums for more coverage, they won’t be that much higher, and definitely won’t more expensive than what you’ll incur being involved in a serious accident.

Will getting into an accident raise my car insurance premium?

Since your driving record makes up such an important part of determining your premium, it’s natural to assume that getting into a car accident will increase your rates. While that may be true, a couple of factors that car insurance companies take into consideration first.

First, the carrier will look at who’s responsible. If you’re not the one who caused the injury or damage, you probably won’t be assessed a higher premium rate. But if you are responsible, then yes, you could see higher premiums. And if you were particularly reckless in causing the accident, such as driving while intoxicated, your rates could skyrocket, and your policy might even be canceled.

Some state laws require car insurance companies to pay out even if the policyholder is not responsible for the accident. These are called no-fault states, and if you file a claim in one of these states, your premium will probably increase.

Second, the car insurance company will look at the the severity of the accident. Some damage is worse than others, and your premiums will probably increase if you file a claim for a particularly severe accident. That may lead you to wonder whether you should report, say, a fender-bender. Although small incidents like a fender-bender seem mild, they may mask serious structural damage, and bodily injuries may not manifest until days later. It may be worth the risk, however small, of increased premiums to file that claim.

Getting into an accident could reveal a history of reckless driving. If the car insurance company notices such a pattern, it will almost certainly raise your premiums.

How can I save money on my car insurance premium?

While there are many circumstances in which you’ll pay higher premiums, there are also occasions when you pay lower ones. Some of the most common ways you can score a lower premium are as follows:

  • Bundle multiple insurance policies from the same company. Some insurance companies offer a cornucopia of different ways to get insured. Buy both homeowners insurance and car insurance from the same carrier, and you may save a little on each.

  • Buy car insurance for all your cars. Similar to bundling insurance products, if you buy car insurance for all your vehicles, you could save a little on the premiums for each one.

  • Take a driver’s education course. If you’re still learning how to drive, you’ll probably have to take a driver’s education class anyway. Showing that you want to be a responsible driver could result in a modest discount on your premiums.

  • Get good grades. If you’re still in high school, some car insurance companies will offer a discount if you get good grades. Like having a high credit score, good grades show the car insurance company that you’re being proactive.

Disclaimer: 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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