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How is Car Insurance Calculated?

How Is Car Insurance Calculated? 

Car insurance premiums are calculated based on factors such as the driver’s age, location, driving history, and other relevant risk factors. While every car insurance company uses independent reasoning to determine premium rates, it always centers around your likelihood of filing a claim for an accident and the reimbursement costs you might accrue. 

Most carriers consider the following information when assessing insurance risk:

  • Age
  • Gender
  • Location
  • Type of vehicle
  • Driving record
  • Credit score
  • The amount of your chosen deductible
  • Types of coverage and limits
  • Driving frequency

Policyholders can incrementally lower their insurance premiums by addressing the above-listed factors within their control. Likewise, because every insurance carrier prices coverage according to its own system, drivers can get quotes from multiple companies and compare rates to find the cheapest available policies

How Car Insurance Works 

Auto insurance functions as a financial safeguard against unpredictable loss. Insurance carriers reimburse eligible vehicle repairs, medical fees, and legal expenses resulting from accidents and other reportable incidents in exchange for an annual premium. 

Though other protections exist, drivers primarily purchase benefits through liability, collision, and comprehensive coverage.

  • Liability: Baseline liability coverage is a legal requirement in most states. It will cover the medical and legal fees resulting from harm an at-fault driver causes to another person or their property.
  • Collision: Collision coverage pays for personal vehicle damage caused during a car accident, regardless of fault.
  • Comprehensive: Comprehensive coverage pays to repair or replace your car for non-collision-related damages, such as theft, vandalism, and natural disasters.

Coverages 

Your level of insurance protection ultimately depends on how you structure your policy. People who spend the minimum legal amount on car insurance typically only have liability coverage to partially absorb financial hardships they might inflict upon other drivers. Policyholders who want their own medical and vehicular costs covered in the event of at-fault losses must opt into comprehensive and collision benefits. 

When purchasing a policy, you must also choose your coverage limits. For example, a policy with a $500,000 liability limit will pay up to that amount for at-fault medical and legal costs. Though lower limits allow for lower premiums, they offer less protection. Regardless of your policy structure, car insurance will never pay for general maintenance or wear-and-tear-related expenses.

The Factors That Determine Your Car Insurance Rate 

Car insurance companies use risk assessment, also known as underwriting, to evaluate their likelihood of paying expensive claims on a tentative policy. Higher-risk drivers incur higher premiums. 

Demographics 

All major carriers work under the assumption that a person’s age, gender, marital status, and occupation directly affect their insurability. For example, women across all age groups cause fewer accidents than men. In particular, statistics have indicated that unmarried men repeatedly have more DUIs than women every year. Therefore, young, single men tend to pay the most for car insurance.

Insurance carriers view inexperienced drivers as liabilities due to their lack of real-life experience and charge them higher premiums. Companies will also raise rates for those who drive their own vehicles for work, such as Uber or Lyft employees. Contrarily, some providers offer discounted rates to people of certain professions, such as teachers, firefighters, and government workers.

Location 

Your city, state, and even zip code can directly alter your insurance premium. Some areas have reputations for heavy traffic, poor infrastructure, crime, and other factors that could contribute to expensive insurance claims. In general, the further you live from a densely populated urban district, the cheaper your car insurance rates will fall.

However, crime and accident rates do not solely factor into location-based underwriting. Owning a car in a county with a history of natural disasters such as storm surges, earthquakes, or fires often leads insurers to view you as a higher claims risk. Likewise, drivers in areas with extreme seasonal precipitation affecting roadways and visibility tend to pay more for coverage.

Type of Vehicle 

When shopping for a car, you must consider how your decision will affect your insurance coverage.  Due to the higher cost of parts and repairs, newer and more expensive vehicles typically coincide with higher premiums. Insurers also charge more to cover sought-after luxury vehicles and cars without alarm systems because of their high theft rates.

Notably, your vehicle’s safety features significantly influence your final insurance costs. Safer cars often sustain less damage in collisions and reduce the severity of driver injuries resulting in expensive medical claims. Honda Civics, for example, cost notably more than similar cars to insure due to their poor safety ratings and frequent targeting by car thieves.

Driving Record 

Insurance companies always check your driving history for violations and previously filed claims.  Typically, any claims documented within the past five years will trigger higher premiums. Likewise, people with traffic violations or accidents on their records must wait several years before requalifying for more affordable coverage.

Insurers see policyholders who break laws, get into accidents, and file claims as liable to repeat offenses. A clean driving record shows your provider that you can drive responsibly and will cost less to insure, allowing them to cover you at lower rates. Some policies even reward customers with a discount for every year they go without an accident claim.

Driving Frequency 

On your application, your insurance carrier will ask how many approximate miles you drive annually.  Simply put, those who drive further and more frequently have a higher probability of filing claims due to the sheer amount of time they spend on the road. On the other hand, a stay-at-home parent who leaves their car parked in the garage and only uses it to buy groceries will cost less to insure.

Credit Score 

Some states use credit scores to determine car insurance premiums. While seemingly unrelated to auto insurance, studies have shown that poor scorers have a higher statistical likelihood of filing expensive claims. Though banned in Hawaii, California, and Massachusetts, every other state allows insurance providers to utilize this controversial underwriting practice.

Some companies view credit history as integral to risk analysis, while others focus more on other factors to determine your final insurance costs. In many cases, a poor credit score can increase your annual premium by hundreds of dollars. However, customers who incrementally improve their scores can slowly reduce their insurance rates with every policy renewal.  

Deductible 

You must select a deductible for each coverage type included on your auto insurance policy.  Deductibles equate to the dollar amount policyholders must pay out-of-pocket for covered damages before insurance benefits take over.  As a general insurance rule, customers who choose policies with higher deductibles always secure lower insurance premiums.

How Much Does Car Insurance Cost? 

Average national car insurance rates for safe drivers sit at $2,150 per year for full coverage and $690 for the legal minimum, or $180 and $58 per month, respectively. However, these numbers can fluctuate wildly. 

Remember that how car insurance is calculated depends on everything from your vehicle type, location, driving history, demographic information, operating frequency, selected coverage types, and reimbursement limits.

At-fault drivers often see these insurance rates increase by around 50% following an accident. To avoid paying hundreds more in annual premiums, customers in certain states can select policies that sell supplementary “accident forgiveness” riders, preventing insurance costs from rising at their next renewal.

How to Keep Your Car Insurance Rates Low 

Despite the many factors listed earlier in this article, there still exist applicable methods to keep insurance rates low, including:

  • Compare car insurance quotes between multiple providers. Every company assesses risk and prices policies differently, sometimes in significant contrast.  
  • Bundle policies. Many carriers offer discounts to people who purchase multiple coverages in one package, such as bundled home and auto insurance.
  • Take courses. Some companies lower prices for drivers who complete safe driving and accident prevention programs.
  • Limit your driving. Working from home or taking public transportation will reduce your annual mileage, directly affecting your premium.
  • Wait it out. Customers who maintain a clean driving record and incrementally increase their credit score will eventually secure lower rates.

Putting It All Together 

Car insurance companies use a wide net of information to assess risk and determine their clients’ annual premiums. While policyholders cannot control certain demographic factors like age or gender, they can bundle policies, limit mileage, explore alternate insurance, or improve their driving records to secure lower rates. 

Perhaps most effectively, those unhappy with their current insurance costs should shop for a new policy from a competing provider. An hour spent comparing quotes from multiple companies could save you hundreds of dollars in premiums every year.

Frequently Asked Questions

Drivers in rural areas encounter less road congestion, theft, and vandalism. Contrarily, city dwellers must drive more defensively to avoid accidents and have a higher likelihood of experiencing vehicle-related crimes. Therefore, rural drivers typically secure lower rates.

No. Every insurance company assesses risk through a unique underwriting process. Though all providers will consider your age, gender, location, employment, credit score, vehicle type, driving history, deductible, and coverages, insurance companies score these factors differently and make premium judgments based on their own data and systemic parameters.

Filing an insurance claim almost always leads to higher premiums, regardless of severity. Therefore, it occasionally proves advantageous to bypass your provider and pay for minor damages out-of-pocket, especially if repairs cost less than your deductible. Considering that reported incidents can stay on your record for up to five years, fronting a couple of hundred dollars for a small scratch or dent could incrementally save you thousands.

Yes, depending on your provider. Auto insurance terms typically last six or twelve months. Most car insurance companies allow clients to pay these in monthly installments or as a lump sum with every renewal.  

Though expensive upfront, paying for a coverage term all at once can eradicate frivolous service fees. Since it saves them the trouble of hunting down and repeatedly processing payments, many companies also offer discounts to those who pay their premiums in full.

Car color does not affect premium costs. This popular rumor comes from the general notion that people who purchase red cars have a penchant for fast driving and tend to get targeted by traffic police. While a statistical argument exists for the latter of these ideas, it does not openly contribute to any major insurance company’s underwriting strategy. 

Car insurance companies view individuals who willingly drive uninsured as riskier by nature.  Therefore, going without insurance for an extended period typically results in higher premiums the next time you secure coverage. Some companies will even deny benefits to returning customers following a prolonged lapse. 

Find an auto insurance policy that meets your needs.

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Find an auto insurance policy that meets your needs.

Get a quote