What is a Car Insurance Premium?

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When you get behind the wheel of a car you’re taking a risk. One accident could cause substantial damage to your vehicle, other property, and your body. The same can be said for other people, vehicles and property involved in the collision. Without auto insurance you can be on the hook for tens or even hundreds of thousands of dollars in damages. 

It’s for that reason, and more, that insurance companies require drivers to hold a minimum level of insurance. Having insurance coverage means you’re paying a monthly, quarterly, or annual premium to the insurance company. Whether it’s your first insurance premium or you’re up for renewal, it’s common to have questions about the different components of a car insurance policy. 

Let’s dive deeper into what a car insurance premium is, how companies calculate it and how you can decrease your car insurance rate. 

Key Takeaways 

  • A car insurance premium is how much you pay your auto insurance company annually or every six months for car insurance coverage. 
  • Generally, your car insurance premium is calculated by looking at factors such as your age, gender, driving record, location, annual mileage, and vehicle make and model. 
  • Since car insurance premiums differ widely between insurers, regularly shopping for insurance premiums is essential to get the best deal.

What is a Car Insurance Premium?

A car insurance premium is the amount of money you pay your auto insurer in return for insurance coverage on your vehicle. You can make these payments monthly, every six months, or annually. 

The cost of your car insurance premium is dependent on the level of coverage you choose along with other factors. For example, if you opt for the minimum insurance required by the state, you’ll pay less than someone who decides to have their vehicle fully insured. 

How Are Car Insurance Premiums Calculated?

Many factors go into how your auto insurance company determines your premium. Each insurance company will use a unique combination of these factors to calculate how much you pay. As a result, you’ll see a wide disparity in rates when shopping for car insurance. This is why shopping around and comparing rates is best if you want to get the most bang for your buck. 

Some of these factors include:

  • Your driving record: Experienced drivers without blemishes on their record will pay less than drivers with less experience or a few tickets or accidents. 
  • Location: Do you live in an urban or rural area? Urban areas usually have higher theft rates and vandalism, so big-city drivers should expect higher insurance premiums. 
  • Age: Are you a teen or senior driver? Younger drivers will pay more for auto insurance coverage because of their limited experience. The same thing goes for older drivers nearing retirement age who will also increase their rates. 
  • Gender: Insurance companies also take gender into account. In general, women are viewed as safer drivers and can expect to see cheaper rates than their male counterparts. 
  • Vehicle make and model: Do you drive a flashy sports car or a budget sedan? That can impact your insurance premium. Even the engine size of your vehicle can factor into the prices you’ll see as you compare insurance costs. 
  • Credit score: In all but three states, insurance companies can use your credit score to determine the likelihood of you filing a claim after an accident. 
  • Annual mileage: How much time do you usually spend on the road? Drivers with a long daily commute will see higher insurance rates than those who work nearby or work from home.  

Since insurance companies use several factors to calculate your rates, shopping around and comparing rates right from the start is essential. Use an insurance comparison site to see dozens of quotes in one place. This will help you quickly find the right premium for your driving needs. 

Compare Auto Insurance Premiums to Get the Best Rate

What is a Car Insurance Quote vs. Premium?

While the terms sound similar, there’s a significant difference between a car insurance quote and a premium. A car insurance quote gives you an idea of how much you’ll pay each month – but the price isn’t set in stone. The insurer or auto insurance comparison calculator will take the information you provide and give you an estimate of how much you might pay. 

This is different from your premium because your premium takes your verified information into account and provides you with a specific price you’ll pay. The premium is then put into your contract. 

What is the Average Car Insurance Premium?

According to the National Association of Insurance Commissioners (NAIC), the average car insurance premium is $1,204. This was a 15% increase from the average price in 2015. With inflation hiking up the cost of just about everything, it makes sense that car insurance is on the rise as well. 

The good news is just because prices are up, it doesn’t mean saving money is impossible. 

What are the Factors that Affect Car Insurance Premiums?

vehicles sitting in traffic

Many factors are considered when setting your auto insurance premiums. Along with common factors like your age and gender, insurers also want to know the level of coverage you’re seeking. 

Here are some of the most common factors auto insurance companies use to determine how much they’ll charge to insure your vehicle. 

Insurance Coverage

What kind of coverage are you purchasing? Do you only want liability coverage, or will you need a comprehensive plan with collision coverage. The insurance policy you select makes a big difference in how much you’ll pay and how protected you are in the event of an accident. The more coverage you require, the higher the cost of your insurance premium. 

Your insurance company may offer additional optional coverage as well such as gap insurance, roadside assistance, or rental reimbursement insurance. Each additional level of coverage you add to your plan will increase your premium. 

Coverage Limits

Your coverage plays a significant role in your car insurance costs. For example, suppose you pick a policy allowing up to $100,000 in property damage coverage. In that case, you’ll pay more for that policy than one with only $25,000 in property damage coverage. 

Insurance Deductibles

Your deductible is the amount you pay out-of-pocket when filing an auto insurance claim after an accident or other covered event. You pay a deductible when you have collision and comprehensive coverage. Higher deductibles lead to you paying lower premiums and vice versa. 

Keep in mind that a higher deductible means you will have to pay more up front when you file a claim before your insurance coverage kicks in. So if you increase your deductible from $500 to $1,000 or even $1,500, make sure you have enough in savings to cover the expense. 

Claims History 

Insurance companies will also examine your claims history when determining your car insurance premium. A driver with a lengthy claims history will appear to be a high risk to insure. If you have a history of getting insurance companies to pay out claims, you can expect to see more expensive insurance premiums. 

How to Decrease Your Car Insurance Premium

If you’re struggling to find an affordable car insurance premium there are some steps you might be able to take to lower your monthly rates and protect yourself on the road. 

Here are a few ways you can decrease your car insurance premium:

Take a Defensive Driving Course

Although a defensive driving course isn’t something you’ll want to do for fun, it can help you save money on your insurance premium. Drivers who take a defensive driving course from an accredited school or state-approved institution can enjoy up to 10% savings. 

You can find approved courses through the National Safety Council. Before enrolling in a class, check with your insurer to ensure they accept it. In addition, keep in mind that some insurance providers limit this discount to only senior drivers.

Seek Out Auto Insurance Discounts 

No one wants to pay full price for auto insurance. To help decrease your car insurance premium and keep some extra money in your pocket, see if you qualify for any of these discounts:

  • Multi-policy discount: Bundle homeowner’s, renter’s, or condo insurance with your car insurance and save big
  • Multi-car discount: Insure multiple vehicles under the same policy and save
  • Good student discount: Have an intelligent student in your family? Save money when you maintain a B average or 3.0 GPA. 
  • Safety features discount: Save money when your car has safety features like anti-lock brakes or daytime running lights 
  • Paid-in-full discount: Policyholders who pay their premium upfront can save money by avoiding monthly fees 
  • Safe driver discount: Insurers sometimes award savings to drivers who’ve maintained a clean driving record for the past three years 

Avoid Traffic Violations

While this is easier said than done, avoiding traffic violations helps keep insurance costs low. Drivers with stellar driving records who haven’t filed a claim will pay much less in car insurance than those involved in several collisions or with numerous tickets. For example, while a driver with a clean record may spend an average of $142/mo., one with one accident on their record can pay $202/mo. That’s an extra $720 per year! 

Adjust Your Deductible 

You can save money on your insurance premium by adjusting your deductible amount. You’ll pay less for your premium if you choose a higher deductible. If you’re a safe driver who avoids accidents like the plague, it’s probably worth raising your deductible. However, if you’re prone to scraps and fender benders, you might want to hold off for now. Also, you only want to set your premium to an amount you can afford to pay if you have to file a claim. If you don’t have the money to pay your deductible, your insurance company coverage won’t be able to help financially. 

Switch to Usage-Based Insurance

Sometimes the best deal on car insurance means getting a little creative. If you’re spending less time on the road than before, consider opting for usage-based insurance. Your car insurance premium is set based on your driving habits. 

Major companies like State Farm, Allstate, and Progressive all have usage-based insurance policies that use real-time data collected from your driving habits to set your rate. They also look at statistical data in your area to get an accurate picture of how risky you are as a driver. 

Regularly Compare Auto Insurance Rates

Finally, one of the best ways to decrease car insurance costs is to shop around regularly for auto insurance. Insurance premiums are constantly fluctuating. That, along with changes in your life, driving record or credit could result in significant savings. Refrain from assuming your current insurer will always give you the best deal. Take matters into your own hands and shop often to see updated rates. 

Use an online auto insurance comparison tool like Compare.com to get free, personalized quotes in minutes. 

See How Much You Can Save on Your Insurance

How Much Will New Drivers Pay for Car Insurance Premiums? 

New and young drivers tend to see the highest auto insurance premiums because of their limited driving history. Their lack of experience on the road means that insurance companies view them as a higher risk than older, more experienced drivers. 

For example, an 18-year-old driver insured with Farmers Insurance can expect to pay around $553 monthly for auto insurance. However, a 65-year-old driver insured by the same company will only pay $143 monthly. That’s a difference of over $400! 

However, don’t despair just yet. There are still ways to save. Since there is no set amount of insurance new drivers need to purchase, they can save money by taking advantage of discounts, remaining on their parent’s insurance plan, keeping a clean driving record and comparing auto insurance quotes to find the best price. 

FAQs About Car Insurance Premiums

Is a car insurance premium paid monthly or annually? 

You can pay your insurance premium monthly, every six months, or annually. Some insurance companies reward drivers who pay their premiums in full with a discount, so check to see if your insurer offers this to drivers.

How is my car insurance premium calculated?

Car insurance premiums are calculated using a unique algorithm that looks at several factors. Auto insurance companies will consider factors like age, gender, location, driving history, credit score, and annual mileage. 

How can I save money on my car insurance premium?

You can save money on your car insurance premium by taking a defensive driving course, inquiring about discounts with your insurance company, increasing your deductible, or switching to usage-based/pay-per-mile insurance. 

When will I see an increase in my auto insurance premiums?

You can expect your insurance premium to increase after an at-fault accident, a filed claim, or when it’s time to renew your policy.

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