What is a Premium? Car Insurance Costs Explained

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Written by Ray Prince Edited by Nick Versaw

Updated January 13, 2023

According to the Consumer Price Index by the U.S. Bureau of Labor and Statistics, auto insurance rates rose 10.3% last year. In light of this, reviewing your existing auto insurance policy is a good idea to ensure that you have adequate auto insurance coverage based on today’s vehicle repair and replacement prices.

What do we mean when we talk about rates? Are we referring to your premium? Car insurance costs you a certain amount every year, so keep reading to learn more about these auto insurance premiums. Find out what they are, the factors that impact all drivers, and how insurance companies determine just how much you pay.

If you think you can find a more affordable auto insurance policy, now is an excellent time to compare quotes from hundreds of reputable insurance companies. Enter your ZIP code below to get started:

What is a Premium? 

As a policyholder, your auto insurance premium is the specific amount of money you pay to your car insurance company for coverage. Repayment schedules for premiums are monthly, every six months, or annually.

Every policyholder pays a different premium based on several factors, including age, gender, ZIP code of residence, vehicle make and model, amount of deductible, and liability limits.

What is a Deductible? 

A deductible is an amount policyholders pay for injuries or repairs sustained after a covered accident. They typically range from $100 to $2,500, which attach to collision coverage, comprehensive coverage, uninsured motorist property damage, and personal injury protection. 

The amount of your deductible impacts your premium. Car Insurance companies pay for costs over your deductible up to each policyholder’s liability limits. After that, it is paid every time you file an insurance claim.

For example, if you have a $500 deductible and an accident results in $7,000 in damage, your insurance company will reimburse you for $6,500 ($7,000 minus your $500 deductible). On the flip side, if an accident only results in $200 worth of damage, you are responsible for paying the entire $200.

How Do Insurers Determine Car Insurance Premiums?

To determine premiums paid for every policyholder, each auto insurance company has its underwriting policies, including but not limited to the following:

• Age: According to the Insurance Information Institute, drivers ages 16 to 20 accounted for 38.52% of all fatal motor vehicle crashes in the United States (2020). In addition, younger drivers are likely to pay higher premiums than middle-aged drivers due to a riskier driving profile and busier bodily injury or property damage claims history.
• Gender and Marital Status: Another study from the Insurance Institute for Highway Safety found that more men than women die each year in auto crashes. This stat is reflected in rates, with men generally paying more than females. By the same token, yet another study revealed that rates are generally higher for unmarried drivers than for married drivers. 
• Location: Denser urban centers will likely pay higher auto insurance premiums than sparsely populated towns and rural areas. As such, Des Moines, Iowa, residents don’t pay the same average monthly premium as New York City apartment dwellers.
• Coverage selection: The policy types and amount of liability coverage you purchase all influence premiums. State minimum coverage with third-party-only benefits is cheaper than full coverage policies with first and third-party benefits by several hundred dollars per year. But it is important to remember that the lower your liability limits, the higher your out-of-pocket expenses may be after an auto accident.
• Deductibles: The higher deductible you have, the lower your auto insurance premiums. According to the Texas Department of Insurance, changing from a $500 to a $100 deductible can cut as much as 20% off your auto insurance premiums.
• Optional coverage: Adding optional coverage to your policy, like rental car reimbursement, roadside assistance, MedPay, and other types of coverage, all affect premiums. 
• Credit score: Drivers with higher credit scores enjoy lower rates than those with poor credit. Insurance providers look favorably upon policyholders who know how to manage their credit, although not all agencies consider credit scores when determining rates.
• Annual mileage: The higher the annual mileage, the higher the premiums. For this reason, many auto insurance providers offer discounts for drivers driving less than 7,500 miles annually.
• Vehicle make and model: One vehicle may be cheaper to insure than a second, thanks to recall history, safety features, depreciation rate, and similar factors.

What Are the Cheapest and Most Expensive Vehicles to Insure?

The type of car you drive impacts the cost of car insurance. According to Kelley Blue Book, the cheapest vehicles to insure are the Chrysler Voyager ($1,272), Honda CR-V LX ($1,285), Mazda CX-3 Sport ($1,294), Fiat 500 Trekking ($1,301) and the Honda HR-V LX ($1,322). 

Conversely, you’ll pay higher rates if you drive one of the most expensive cars to insure, including the Maserati Quattroporte S GranSport ($4,823), Maserati Ghibli S Q4 GranSport ($4,208), Tesla Model S ($4,143), Tesla Model X ($4,025), and the BMW M760i xDrive ($3,914).

All figures represent the national average rate. And you should note these figures are subject to change based on the auto insurance company and driving record. Your leasing or financing company may also impose certain insurance requirements, such as full coverage, to better preserve their vehicle’s value.

What States Have the Lowest and Highest Premiums?

According to the National Association of Insurance Commissioners 2019 data, the states with the lowest average annual auto insurance premium are Maine ($696.37), North Dakota ($703.73), and Iowa ($714.86). Conversely, the states with the highest average annual auto insurance premiums are Louisiana ($1,557.22), Michigan ($1495.94), and New York ($1,445.30).

Why Are Outside Factors Driving Auto Insurance Premiums Upward?

There are market conditions that drive auto insurance premiums higher outside of a policyholder’s profile.

One reason is rising car prices. According to Kelley Blue Book, the average price for new vehicles was 10% higher in August 2022 versus August 2021. The disparity is even greater for used vehicles, with the average used car in America selling 42% higher towards the end of 2021 than in December 2019.

Another reason for rising auto insurance premiums is the higher percentage of comprehensive claims. One significant reason is stolen catalytic converters. Reports of theft have grown an estimated 15.8% year-over-year, with more than 65,000 thefts nationwide in 2021.

Finally, inflation is leading to higher auto insurance premiums. Inflation results in increased costs due to both labor and chip shortages and limited supply versus increased demand for automotive parts.

How Can I Lower My Premium?

There are many ways drivers can lower their auto insurance premiums.

One of the best ways drivers can lower their premiums is via car insurance discounts. They generally fall into four categories: driver, policy, usage, and vehicle-related:

• Driver discounts: Some discounts reward drivers for positive behavior and a strong driving history. A good driver discount is awarded to drivers with a claims-free driving record for a minimum of 3-5 years. Other common discounts in this category include good student discounts, good credit history discounts, and discounts for successfully completing a defensive driving course.
• Policy-related discounts: These discounts extend to how your policy is structured. These discounts include but are not limited to enrolling in auto-pay or paperless billing, paying an annual policy upfront, and insuring two or more vehicles under the same policy all qualify. Discount percentages vary depending on the auto insurer.
• Usage-based discounts: One of the most popular usage-based discounts is a low-mileage discount, extended to drivers who drive less than a specific number of miles per year. 
• Vehicle-related discounts: You may qualify for a discount depending on the type of equipment you have in your vehicle. For example, installing anti-theft devices, anti-lock brakes, daytime running lights, or telematics devices to monitor your driving behavior male result in a small discount.

Shop Around for the Best Car Insurance Rates

Now that you understand your premium, car insurance cost factors, and outside influences, you can get a sense of why your auto insurance premium may increase. If your current auto insurance company‘s rates have gone up despite zero claims, at-fault accidents, speeding tickets, and traffic violations, it may be time to look for a new car insurance policy.

Compare.com lets you view auto insurance quotes from hundreds of car insurance companies, including Liberty Mutual, Bristol West, Direct Auto, and Farmers.

See all car insurance quotes in one place by entering your ZIP code below:

Ray Prince Insurance Writer

Ray Prince is an auto insurance writer for Compare.com based in Miami. He specializes in writing long-form content and product descriptions for the automotive and auto insurance industries. His work appears on sites such as Freeway Insurance, Auto Guide, Turn5, Mercedes Benz U.S.A., and Pelican Parts, with past and current roles as a digital operations manager at Pandora Media and iHeartMedia.