Your auto insurance premium is the amount of money that you regularly pay your insurance provider in exchange for car (auto) insurance coverage. The auto insurance premium you pay goes in line with the types of coverages detailed in the insurance policy.
Your coverages ensure that you’re protected, financially, while on the road. This applies whether you get into an accident or a collision. You may also be protected in case of theft or vandalism of your car.
Typically, every insurance company determines their premium rates differently. However, your auto insurance premium is usually based on your details, the coverage selected, and the type of car you own.
Note: If you want to save on the amount of auto insurance premium you pay, you may need to compare multiple insurers rates.
What Is Auto Insurance?
Auto insurance is a contract that you enter into with the insurance agency or company to gain protection from financial loss in the event of an auto accident theft, vandalism, or any other covered loss.
So how does auto insurance premium work?
When you purchase auto insurance and enter into an agreement, you’ll pay the agreed auto insurance premium regularly. Usually every month or every six months. Sometimes you can pay it yearly depending on the type of payment options the insurance company offers you.
In exchange for the auto insurance premium you pay, the insurance provider will offer you coverage as outlined in the insurance policy agreement. It means the insurance company will pay your losses or damages and any other incurred loss spelled out in your auto insurance policy.
Auto insurance can cover many things. The three most known items (types) that auto insurance covers include:
- Property coverage – for instance, theft of or damage to your car
- Medical coverage – the medical cost associated with treating injuries and rehabilitation
- Liability coverage – payment to other parties for property damage or bodily injury
Remember that your auto insurance premium is different from the insurance deductible. The deductible is the amount you agree to pay out of your pocket on an approved claim before you receive the insurance claim. Insurers offer the option of deductible as proof of financial responsibility. The more deductible you agree to pay, the lower your insurance premium will be.
Essentially, the law may mandate basic auto insurance, but requirements usually vary from state to state. Besides, insurers place each auto insurance premium pricing individually (a la carte) to allow you to customize premium amounts that suit your budget and needs.
Note: Usually, the auto insurance premium costs are based partly on the particular types of insurance coverage you choose. However, other factors also influence your total cost.
How Are Auto Insurance Premiums Calculated?
Every insurer’s goal is to balance your rates with your risk and your likelihood of a claim. This is why insurance providers consider many factors and conditions when setting auto insurance premiums. Most of the factors determining the premium rates are usually focused on how risky the insurer sees the driver.
For instance, a 17-year-old young man in a brand-new SUV car will pay much higher auto insurance premiums than a 37-year-old woman who drives a station wagon. The young man will pay more insurance premium because he is more likely to be involved in an accident, and since his car is expensive to replace or repair, his risk or filing a claim can be costly to fund.
Insurance premium rates are different by state and the insurance company. Besides, each insurance company uses its tailor-made, regularly updated formula to calculate each individual’s insurance premium.
Here are some of the details insurers may consider when calculating and setting your auto insurance premium.
Your personal details
Your age, gender, marital status, and where you live (location and neighbourhood) are significant factors in calculating your premium rates. Younger drivers are assumed to be high-risk drivers than seasoned, more experienced drivers, while males are more likely to drive carelessly than women.
A poor credit history can make your car insurance premium rates too expensive just like it can affect a bank’s loan facility. Insurers assume that drivers with poor credit are more likely to file insurance claims.
Insurers collect data on your driving history to see how responsible you have been in the past, both behind the wheels and with your money. If you’ve been careless, you will get higher premium rates.
Insurance providers charge higher premiums for faster, bigger, newer, and more expensive cars. This consideration applies across the board.
The Coverages You Select
The minimum insurance might not be expensive, but adding optional coverages to your policy will increase your premium rates. You need to select your coverages to avoid paying high premiums carefully.
Your insurance deductible amount
Usually, when you choose to pay a higher insurance deductible, your insurance premium will be lower than someone who chooses to pay a lower deductible.
You can take advantage of the additional discounts that your insurer may offer you for performing certain actions. For example, by taking a defensive driving course, installing more security features on your car, or paying for an upfront coverage of, say, one full year, you may get insurance discounts.
Individuals on the Policy
If you have more drivers on your policy, you will pay higher premiums each month than someone with just one driver on their policy.
Your driving distance and patterns (how far and how often) are critical factors in determining your premium rates. If you often drive more distances, you stay on the road for longer periods, which puts you at risk with increased chances of accidents. The insurer will charge you high premiums because you’re a high-risk driver.
A lapse in coverage
Insurers do not like people who lapse their payments. When you lapse your auto insurance, you become a risky and negligent client to insurers. This will make your rates go up.
Is There A Difference Between A Premium And A Quote?
There is a difference between an insurance quote and a premium.
When you are shopping for insurance, different insurance companies will give you different insurance quotes. An insurance quote is an estimate of how much the insurance coverage(s) that you’ve selected will cost you.
Note that, to balance precision with simplicity, many insurance companies don’t usually gather as much information on your record when creating an insurance quote as they do when writing your actual policy.
The quote is not a true representation of the insurance policy that you will receive.
For instance, you may simply give information about your driving and credit history as excellent, OK or poor when getting a quote. However, once you actually sign up for insurance, the insurer will calculate your credit-based insurance (CBI) score to calculate your premium. This may make your rate to drop or be worse than the amount specified on the initial quote.
With many factors affecting and influencing auto insurance premium rates, you need to shop for appropriate auto insurance. It is important to gather and compare different insurance quotes from multiple auto insurance providers. Don’t forget to ask about the insurance discounts or other ways that can help you reduce the cost of your auto insurance premium.