What Is a Car Insurance Premium?

Getting car insurance is critical in protecting yourself and your vehicle from the risks of everyday driving. But what is a car insurance premium, and how does it affect the cost and coverage of your policy? 

This guide will explore everything you need to know about car insurance premiums, including how they are calculated and how to lower the cost of your car insurance. 

So whether you’re just starting out and shopping for a policy or looking to make changes to an existing plan, we’ve got you covered. Let’s get started.

What is an insurance premium?

Simply put, an insurance premium is the monthly or yearly cost you pay to an insurance company in exchange for coverage against damages or losses caused by

• Accidents
• Theft
• Vandalism
• Natural disasters and other unforeseeable risks

Your premium is based on several factors, including your driving record, the type of car you drive, and the amount of coverage you need. 

The Difference Between Insurance Quotes and Premiums

While “premium” and “quote” are often used interchangeably, there is a difference between these two concepts. A car insurance quote is an estimate of how much a policy will cost based on the information you provide about yourself and your driving history. Learn more about what affects a car insurance quote.

On the other hand, a premium is the actual amount of money you’ll pay for your insurance policy. Therefore, your premium may differ from your quote if you’ve had any changes in your life that would affect your risk level (e.g., getting married, buying a new car, etc.). 

When shopping for insurance, compare multiple quotes from different companies before agreeing to pay a premium. This way, you’ll know how much coverage will cost you and which company offers the lowest premiums.

The Difference Between Insurance Deductibles and Premiums

Simply put, your premium is the amount you pay for your insurance coverage. Your car insurance deductible is the amount you pay out-of-pocket before your insurance coverage takes effect. You typically pay your premium monthly, while your deductible is paid when you file a claim.

It’s worth noting that having a lower deductible usually means having a higher premium, and vice versa. That’s because the higher your deductible, the more financial risk you take. For instance, if you have a high deductible and something happens that requires you to make a claim, you’ll have to pay more out-of-pocket before your insurance coverage kicks in.

Ultimately, it’s up to you to decide what balance you want to strike between your premium and your deductible. If you rarely need to use your insurance, it might make sense to go with a higher deductible and save on your monthly premiums. 

But if you’re someone who often needs to use their insurance, it might make more sense to go with a lower deductible so that you don’t have to pay as much out-of-pocket when something happens.

How are Car Insurance Premiums Calculated?

There is no one standard formula for calculating auto insurance premiums. Different companies may use different criteria in assessing risk. However, here are some of the most common factors that may affect your premium.

Age

Insurance companies consider young drivers (especially males) to be high-risk drivers. That’s because they are more likely to be involved in accidents or cause property damage due to inexperience behind the wheel.

Therefore, younger drivers often pay higher premiums than older drivers. Comparing car insurance rates by age and gender can help you find the best price for your policy.

Driving Record

Your driving record, or history of accidents and claims, will play a major role in determining your monthly car insurance premiums. Companies will take into account things like

• Previous accidents
• Moving violations
• DUI/DWI charges
• Tickets for certain offenses (e.g., speeding, reckless driving, etc.)

If you have a history of reckless or irresponsible driving, you may be required to pay a higher premium.

The Type of Car You Drive

Luxury vehicles and sports cars are typically more expensive to insure than standard, everyday vehicles. This is because these cars tend to be involved in more accidents and cost more to fix or replace. In addition, certain types of vehicles may be targeted by thieves or vandals more often than others.

Location

Where you live can have a significant impact on your insurance premium. For example, you may have to pay higher rates if you live in an area with high crime rates or frequent natural disasters. Similarly, some states have laws requiring car owners to carry additional types or levels of insurance coverage.

Type of Coverage

If you add certain types of coverage to your policy, like comprehensive or collision coverage, you may see an increase in your premium.

Your Deductibles

A higher deductible, or the amount you pay out-of-pocket towards damage repairs, means a lower premium. However, remember that choosing a high deductible means you’re responsible for paying more money upfront if you need to file a claim. 

Credit History

A good credit score can help lower your premium, as insurers see drivers with good credit as less risky. On the other hand, you may have higher rates if you have poor credit or a low credit score.

How to Lower Your Car Insurance Premium

Given the many factors that go into determining your auto insurance premium, there are several steps you can take to lower it.

Compare Insurance Companies

It’s a good idea to shop around and compare different insurance policies. For example, different car insurance companies often offer different discounts and coverage options, so you can find a policy with lower premiums by doing some research.

Maintain a Good Driving Record

The more accidents and violations you have on your driving record, the higher your premium is likely to be. Therefore, it’s important to maintain a good driving record and avoid getting into any accidents or traffic violations.

Increase Your Deductible

Choosing a higher deductible can also help to lower your premium. While this means that you will be responsible for covering more of the costs yourself if you need to file a claim, it will also result in a lower premium.

Ask for Discounts

Taking advantage of auto insurance discounts can help you save money, so it’s always worth asking about any potential discounts available to you. Most companies offer discounts for things like having multiple policies with the same company, paying your premium in full, or being a safe driver. 

Take a Defensive Driving Course

Taking a defensive driving course can also help to lower your premium. Many insurance companies offer defensive driver discounts for drivers who have taken such courses, as it can help to improve your driving skills and reduce your risk of being involved in an accident.

Build a Good Credit Score

Having a good credit score can also help to lower your premium. If you have poor credit or a low credit score, it’s worth taking steps to improve your credit and build a good score. 

This may include making payments on time, paying down debt, and avoiding making new credit mistakes. With a good credit score, you can get a lower premium from your insurer.

Do car insurance premiums ever increase?

Most insurance companies will only increase your car insurance premium in certain situations. For example, your insurer may choose to raise your premium if you get into an accident, file a claim, or have multiple violations on your driving record.

However, if you maintain a good driving record and avoid filing claims, your premium should remain the same over time.

How much is an average car insurance premium?

The average cost of an auto insurance premium is $134 monthly for a full coverage policy. 

Of course, this amount can vary depending on several factors, such as age, driving history, and location. However, it’s important to remember that you can shop around and compare quotes to find the best rate possible.

What is the average cost of car insurance per state?

The table below provides a breakdown of average auto insurance premiums per state.

[Full Coverage Car Insurance Monthly Rates by State and Provider

The average cost of car insurance per state can vary greatly, depending on factors such as the types of vehicles in the area, traffic congestion levels, and the average income in the state.

What You Need to Know About Car Insurance Premiums

Auto insurance premiums are the rates you pay monthly or annually in exchange for insurance coverage. Premiums vary by state and driver, but you can still get low rates on car insurance by shopping around and comparing multiple companies. 

Each company considers risk differently, and you will likely find the lowest rates possible when comparing premiums from at least three companies. 

Be aware that car insurance quotes and premiums are not the same things. As you shop around for insurance, understand that car insurance quotes are an estimate of how much a policy will cost based on the information you provide. The final amount of the premium you’ll actually pay could be more or less based on personal variables like age, gender, and driving history.

Case Studies: Understanding Car Insurance Premiums

Case Study 1: The Young Driver

Sarah, a 22-year-old driver with a clean driving record, was excited to purchase her first car. However, when she started researching car insurance, she was surprised by the high premiums she was quoted. Despite her excellent driving history, insurance companies considered her age and lack of driving experience as high risk.

Sarah compared quotes from multiple companies and found a policy with a slightly lower premium. She decided to take a defensive driving course to further reduce her premium and improve her driving skills.

Case Study 2: The Luxury Car Owner

John, an owner of a luxury sports car, understood that his car would come with higher insurance costs. When he obtained quotes for his car insurance, he was taken aback by the high premiums. Insurance companies considered his vehicle’s higher risk of accidents and theft, resulting in increased premiums.

John decided to shop around and found a company that specialized in insuring luxury cars, offering competitive rates. He also increased his deductible to lower his premium and took additional security measures, such as installing an alarm system, to further reduce the risk and potentially lower his premiums.

Case Study 3: The Safe Driver With Poor Credit

Lisa, a driver with an excellent driving record, was surprised when she received higher car insurance quotes due to her credit score. Although she had never been involved in an accident or received a ticket, insurance companies considered her credit score a risk factor.

Lisa took steps to improve her credit score by paying bills on time and reducing her debt. As her credit score improved, she requested new quotes and found insurance companies willing to offer lower premiums. By diligently working on her credit, Lisa managed to secure more affordable car insurance coverage.