Q

What is a car insurance premium?

A

A car insurance premium is the regular cost you pay to keep your policy active. In general, the more risk you pose, the higher your premiums will be.

Zack SigelKara McGinley

Zack Sigel & Kara McGinley

Published May 18, 2020

KEY TAKEAWAYS

  • You can pay your car insurance premiums monthly, bi-annually, or annually. When calculator your premiums, your car insurance company will factor in various details, including your age, driving history, credit score, the make and model of your vehicle, and more

  • The amount of coverage you need will also affect the price of your premiums. Most insurance companies offer discounts for things like safe driving or for safety measures you take, like installing an anti-theft system to your vehicle

  • When you renew your auto policy, your rates might either go up or down. If you were liable for any accidents your premiums are likely to go up

  • You should shop around for new car insurance every one to three years. Shopping around can result in lower premiums

When you purchase car insurance, you’re paying for the protection from financial liability when you cause an accident and damage someone else’s vehicle or cause them injury. Car insurance can also reimburse you for property damage to your own car, medical expenses, and damage from other perils, like falling objects or hail. To keep this protection, you pay premiums each policy period your car insurance is in force, either monthly, bi-annually, or annually.

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 $935.80. For people who purchase all of the major components of car insurance – including liability insurance,collision and comprehensive insurance – the average annual premium is $1,062.23

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 change, such as where you live. But your premiums could be readjusted every policy period to account for changes in your life, and they sometimes decrease as you gain more experience as a driver and demonstrate a history of safe driving. Most insurance companies offer an array of discounts, so you might be able to lower your premiums if you qualify for any of them.

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.

In this article:

How are car insurance rates calculated

Car insurance premiums are calculated based on 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

Car insurance is made up of different types of coverage, and each coverage type offers a different kind of protection. 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 make them more expensive.

Below are the coverage components that make up what is called a “full coverage” auto policy:

Coverage TypeWhat It Does
Bodily injury liabilityThe part of your liability coverage that pays for medical bills if you've injured someone in an accident
Property damage liabilityThe other part of liability coverage, covers the cost of property damage you've caused in an accident
Personal injury protectionCovers medical expenses for you or your passengers after an accident
Uninsured/underinsured motoristCovers the costs if you're in an accident caused by a driver with little or no car insurance
ComprehensiveCovers damage to your car that happens when you're not driving
CollisionCovers damage to your car after a car accident, no matter who was at fault

Calculate how much car insurance you need before applying to make sure you’re getting quotes that accurately reflect what you can afford. 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 insurance premiums if you’ve been a safe driver.

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.

If you have accidents on your motor vehicle record (MVR), don’t panic. Most insurance companies only look at the past three or five years of your driving history, so if you’ve had an accident or violation but kept a clean record since then, the incidents will eventually “fall off” and no longer affect your car insurance rates.

Your age and location

Younger drivers will have to pay more for car insurance than older ones. That’s because car insurance companies see younger drivers as not only less experienced but also more likely to take risks while driving. (Car insurance premiums start dropping significantly around age 25.) They start rising again, however, once you’re considered a senior driver.

Your ZIP code matters too: 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. Drivers who live in dense areas with higher accidents rates and more cars on the road may also pay more than drivers who live in less populous places.

Your car

Because more expensive cars are usually more difficult to repair, they’re also more difficult to insure. 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, like electronic stability control.

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. Many car insurance companies also offer discounts for different affiliations, like if you're an alumni from a certain university or if you are a member of the military.

Learn more about car insurance discounts.

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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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 how to adjust your rates.

What increases your premium

During the policy period, if you file multiple claims or have a claim 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.

Your rates may also be affected by factors completely beyond your control. Even if you were a perfect driver, your premiums may go up because of changes in the insurance industry, more cars on the road or higher repair costs in your area.

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 be able to 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 an 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 on 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 car insurance 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 full-coverage policy than someone in North Dakota. Louisiana has the highest combined premiums on average; Idaho has the lowest.

The average cost of car insurance liability coverage is $556.51 nationwide. To add collision and comprehensive coverage will cost an additional $342.40 and $153.32, 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 – requires a deductible. By opting for a higher deductible, thus reducing the car insurance company’s financial burden, you’ll pay lower premiums. But don’t set your deductible higher than you’d actually be able to pay in the event of an accident.

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 mobile app, or even over the phone.

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. Your car insurance company may also offer discounts for payment methods, like a discount for going paperless, or for paying your premiums in-full at the start of your policy term.

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, and getting into an accident without insurance can be even more dire .

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.

Car insurance premiums and COVID-19

The COVID-19 pandemic is changing car insurance needs, and insurers are responding in kind. Due to the ongoing coronavirus outbreak, many insurance companies have announced partial refunds on premiums. More people staying home means fewer cars on the road, and fewer claims for companies to pay out.

For drivers whose ability to pay their premiums has been impacted by the pandemic, insurers are also changing their policies regarding cancellation. Many major car insurance companies have also announced that they are pausing non-payment policy cancellations. If the coronavirus outbreak has affected your ability to pay your car insurance premiums, contact your insurer and ask about financial hardship options.

The following car insurance companies have announced car insurance premium refunds or reductions as of April 2020:

Insurance CompanyResponse to COVID-19 as of April, 15th
Allstate- 15% money back based on premiums in April and May
- Extended coverage to policyholders using their personal vehicles to deliver food, medicine, and other emergency goods
Amica- 20% credit on April and May premiums
- No policy cancellations or non-renewals until June 2
Chubb- 35% premium reduction for the months of April and May
CSAA- 20% refund for two months of auto insurance premiums
- Paused non-payment policy cancelations until May 31
Farmers Insurance- 25% premium reduction in April
- Paused non-payment policy cancellations until May 1
GEICO- 15% credit to policyholders as their policy comes up for renewal. The credit will be applied to 6-month policies renewing between April 8 and October 7, 2020 and 12-month policies renewing between April 8, 2020 and April 7, 2021.
- Also extending the credit to new policies purchased between April 8, 2020 and October 7, 2020
- Paused non-payment policy cancelations until at least April 30
Liberty Mutual- 15% refund on two months of auto premiums
- Late fee charges have stopped and non-payment policy cancelations are paused
- Extended coverage for policyholders who use their personal vehicles to deliver food, medicine, and other emergency goods
Mercury Insurance- 15% off monthly auto insurance premiums in April and May
MetLife- 15% credit for April and May
- Paused non-payment policy cancellations through July 1, 2020
- Extended coverage for policyholders who use their personal vehicles to deliver food, medicine, and other goods until May 1
Nationwide- $50 one-time premium refund per policy or a refund on a percentage of your policy premium depending on where you live
State Farm- On average, most customers will receive a 25% policy credit
Travelers- 15% credit on April and May premiums
USAA- 20% credit on two months of premiums for policyholders with active policies as of March 31, 2020
- No policy cancellations or late fees through June, 17 2020