What are Car Insurance Premiums?

The worst happens. You get in a fender bender on your way home from work. Everyone is okay, but your car needs $1,000 worth of repairs, and the other person’s car needs $3,000 of repairs. Figuring out who has to pay, and where to get that money would be a huge headache. And it would probably end up in some type of lawsuit. This is where care insurance comes in.

Let’s start with the basics. Insurance is a way of protecting you from financial loss. When you buy insurance, the insurance company agrees to compensate you for a set of specific losses and conditions. The contract you enter into with an insurance company is called an insurance policy.

Your car insurance premium is the amount of money you pay your insurance company for this policy. For this amount of money—the premium—the insurance company agrees to cover certain accidents or mishaps. You might pay your premiums every month or just once every six months. The insurance companies have very complex ways to decide how expensive your premiums will be.

How Do Insurance Companies Calculate Premiums?

When you are shopping around for insurance, different insurers will quote different prices. Why is this? You and your car are exactly the same. Are some companies just trying to make more money off of you? Not really. The difference is in how each company calculates the risk that you pose, or the “risk calculation,” in insurance-speak.

For instance, a young driver with little experience is statistically more likely to get into accidents and therefore, poses a higher risk. Your car type is also a factor: a Mercedes is more expensive to repair after an accident than a Kia. You can also choose to have more coverage, or less. Many factors affect your premium rates.

As you compare rates, make sure to compare the exact same amount of coverage and the same deductible amounts. Otherwise, you are comparing apples to oranges, and lower prices may be for less insurance coverage. Even when you compare the exact same coverage from different companies, you will still find price differences. Why? Each company has a secret algorithm to weight the risk factors. One company may have a formula that is more beneficial to you.

Factors That Affect Risk Calculation

  1. Age, gender, marital status, and location

Younger drivers are less experienced and also more likely to take risks. Males are also more risk-taking than females. People who are married are seen as more responsible and therefore lower risk. The area you live in will also have statistics on accidents or insurance claims, so that will also affect the rates.

  1. Driving History

If you have no points on your license and have never been in an accident, you are considered a safer driver. Moving violations like speeding count against you, as do accidents. The longer it has been since you have gotten a ticket, the less likely it is to affect your rates. A DUI conviction will raise your insurance rates, and some companies will refuse to give you insurance. In most states, the DUI will drop off your record after a certain number of years, and therefore stop affecting your insurance rates.

  1. Car Type and Age

More expensive, newer, and faster cars will all pay higher premiums. Newer cars will cost more to replace, and people with faster cars tend to use that speed, which is riskier. Older, cheaper cars don’t cost as much to repair or replace, so they also cost less to insure. If your car has safety features installed, you may get a bit of a discount on your rates.

  1. Mileage and Commute Distance

If you only drive a little, say once a week to get groceries, your risk of getting into an accident is much smaller. The more miles you drive in a year, the more time you will spend on the road, and the more likely it is that you will experience an adverse event. Likewise, if you commute by car, many miles from home, this will quickly bump your miles per year, and therefore, your rates.

  1. Coverage types, amounts, and deductibles

The dollar amount of coverage and the types of occurrences that your insurance cover will affect the rate. One policy may have a maximum coverage in an accident of $500,000, while another would cover up to $1 million. The deductible, or the amount you have to pay before your coverage kicks in also affects rates. If you choose a $500 deductible, you will pay lower premiums, than if you choose a $100 deductible policy.

  1. Miscellaneous Factors

Adding more people to your policy, like your spouse and your child, will increase your premiums.  Your credit history can also positively or negatively affect your premium rate. You can get a discount on your rates by taking a defensive driving class, getting good grades (if you are a student), bundling your car insurance with home owner’s policy, or for paying for the full year up front. Different insurers will have different discounts available.

Conclusion

There are many factors that can affect how much you will pay in premiums. Finding the right amount of coverage for your needs is important. Because different companies use different formulas to calculate the premiums, it pays to shop around to find the right combination of lower cost and the best coverage. Take the money you save and do something fun with it—maybe go for a long, safe drive in the countryside.

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