What Is a Car Insurance Premium?
Your car insurance premium is the amount you pay your insurance company on a regular basis, often every month or every six months, in exchange for insurance coverage. Once you've paid your premium, your insurer will pay for the coverages detailed in the insurance policy, such as liability and collision coverages.
Every insurance company determines its rates differently, but your premium is usually based on details about you, the type of car you own and the coverages you select.
Comparing rates from multiple insurers is typically the best way to find savings on car insurance premiums.
All types of insurance, not just auto, require you to pay a premium; homeowners, life and renters insurance also require premium payments.
How are car insurance premiums calculated?
Insurance companies consider many factors when setting car insurance premiums. Every insurer's goal is to balance the amount it charges you with how likely you are to require an insurance payout.
For example, a 16-year-old boy in a brand-new sports car will pay a much higher insurance premium than a 40-year-old woman in a station wagon. This is not only because the boy is more likely to be in an accident, but also because his car will be more expensive to repair.
Every insurer uses its own regularly updated formula to calculate your premium. Some details your insurer may consider when setting your premium:
- Personal information: Your age, gender and where you live.
- Credit and driving history: The more responsible you have been in the past with your money and behind the wheel, the lower your premium.
- Car type: Newer, faster and more expensive cars have higher premiums across the board.
- What coverages you select: Adding optional coverages like roadside assistance to your insurance policy will increase your premium, while cutting coverage, like selecting lower limits for your liability portion, will lower it.
- Discounts: Most insurance companies offer additional discounts for performing certain actions, such as taking a defensive driving course or paying for a year of coverage up front.
- Deductible amount: The higher your deductible, the lower your insurance premium will be, and vice versa.
- People on the policy: The more drivers you have on your policy, the more you'll pay each month.
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Lowering your insurance premium
Of course, some of these factors are harder to change than others, and some can't be changed at all. It's not realistic to move to a different city just to save money on car insurance. But you can usually customize your insurance policy to fit your needs and budget, as long as you stay within the insurance requirements in your state.
Many insurance companies will show you a breakdown of your coverage, so you can make an informed decision, balancing the lower premium cost with increased risk.
It is important to have a good understanding of what your auto insurance covers so that you only pay for coverages you need.
Ultimately, every insurance company weighs variables differently. The simplest way to lower your premium is to shop around at different insurers to find the cheapest car insurance for you.
The difference between a quote and a premium
When you receive a quote from an insurance company, that's an estimate of what they will charge you for insurance. In order to balance precision with simplicity, insurance companies don't gather as much information when creating an insurance quote as they do when writing an actual policy.
For example, when getting a quote, you might simply be asked if you have excellent, OK or poor credit. Once you've signed up for insurance, your insurer might calculate your credit-based insurance (CBI) score when determining your premium. Your rate could be better or worse than what was specified in your quote.
How often do I have to pay my premium?
Different insurance companies will ask you to pay your auto insurance premium at different intervals. The most common options are monthly, twice a year and annually.
Many insurance companies will let you choose how often you'd like to pay, and you'll typically get a discount when you pay more up front.
In some cases, you may be required to pay your entire term up front. This is particularly common if you're deemed an at-risk driver — for example, if you previously let your insurance lapse or require an SR-22 form on file. This is one way insurance companies reduce the risk of insuring at-risk drivers.
When do automobile insurance premiums increase?
Car insurance is generally sold in either six- or 12-month terms. However long your term is, your insurance cost will stay the same for that term, unless you make a change to your policy, such as buying a new car or moving to a new house.
Once your term is up, your insurance provider will reassess your premium. If you were involved in an accident or caught speeding, your rate might increase. Alternatively, if you took a safe driving course, your rate might go down.
Insurers are also constantly adjusting their models for how much to charge for insurance, so it's possible your rate will fluctuate without any changes to your driving status at all.