How auto insurance premiums are calculated
Updated October 16, 2024, 2:46 AM EDT
Although all states don’t require car insurance, all require drivers to meet basic financial responsibility requirements. If you choose to buy car insurance, you can expect to pay a car insurance premium on a regular basis.
A car insurance premium is an amount you pay periodically to keep your car insurance policy active. This policy is a contract between the driver and the insurance company that protects the driver from financial liability in the event of an accident or theft.
There are several factors that affect the price you pay on your car insurance premium. Potential shoppers can benefit from online car insurance calculators offered on most insurance company websites before deciding on a policy.
What factors affect auto insurance premiums?
Below are seven factors that affect your car insurance premiums based on the information that you provide.
- Type of car
- Your driving habits
- Geographic location
- Age and gender
- Your credit history
- Types of coverage
- Limits and deductibles
1. Type of car
Insurance rates vary based on the type of car you have. Some cars are more expensive to insure than others. The likelihood of theft, cost of repairs, engine size, and safety record affect the price as well. Typically, vehicles that have extra safety features such as anti-lock brakes or anti-theft devices may qualify for auto insurance premium discounts.
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2. Your driving habits
If you’re a new driver or if you’ve been in several accidents, your premium is likely to be higher than an experienced driver with a clean record. Auto insurance companies also look at how much you use your car. The more miles you drive, the greater exposure to potential risk.
3. Geographic location
Geographic location is important and where you live and park your car affects your auto insurance premium. Drivers living in areas with higher rates of reported accidents, theft, and vandalism may pay higher premiums.
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4. Age and gender
Statistically, older and more experienced drivers are involved in fewer accidents than younger drivers. Insurance companies generally charge drivers below the age of 25 higher premium rates. Women also tend to pay less than men due to being involved in fewer accidents.
5. Your credit history
Most car insurance companies will charge you more if you have poor credit or no credit history because you're considered more of a financial risk. If you live in California, Massachusetts, or Hawaii your insurer is not allowed to take your credit history into account.
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6. Types of coverage
What coverage you choose greatly affects your premium. Coverages that are generally included in a car insurance policy are liability coverage, comprehensive coverage, collision coverage, uninsured/underinsured motorist coverage, and medical payments or personal injury protection. Depending on the state and where you live, there may be car insurance coverage requirements.
7. Limits and deductibles
The limit is the maximum amount your policy will pay towards a loss. You can adjust this based on your needs but the higher the coverage, the higher your premium may be. Your deductible is the amount you pay before your insurance coverage takes over for a covered loss. A higher deductible generally means you pay less on your premium.
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Why is it important to compare auto insurance premiums?
Not all car insurance coverage is the same and it also varies by insurer. Shopping around for the best car insurance deal is a good way to find the lowest rates and save cash.
It pays to shop around. The best way for you to be prepared, and possibly lower your premiums, is to use a car insurance premium calculator to give you a better understanding of how much you will pay towards your premium.