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How does a car insurance premium work?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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Reviewed byDaniel Walker
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UPDATED: Mar 19, 2020

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The lowdown...
  • Premium is another word for the rate that you pay for your car insurance coverage
  • There are some things that you can directly influence in determining the price you pay for car insurance, such as the different coverage options you choose from, what amount you choose for your deductible and the policy limits that you choose for your coverage
  • Other factors that influence your premium are not so easy to change, such as your driving record, credit score, where you live, the type of car you drive, who else lives in your household, how long you have been driving and how many miles you drive your car each day
  • The rate you pay for insurance is based on a formula used by your car insurance company to calculate the influence of all of these factors in your risk level as a driver
  • The premium is set for the specific term of your policy, and it can either be increased or decreased by the car insurance company after the end of your policy term

One of the reasons that you may be curious about what goes into deciding your car insurance premium is that the rate that you pay for car insurance has either increased or decreased recently.

There are some things you can immediately do to influence the rate that you pay for car insurance, while other factors could take some considerable time to change on your end.

Your car insurance premium is a mandatory expense because state law mandates that you have car insurance coverage. However, there are still things that you can do on your own to make sure that you do not pay more than you absolutely have to for car insurance coverage.

The best way to get started is by doing a rate comparison of several companies. Just enter your zip code above to begin.

The Basic Categories of Factors that Affect the Rate You Pay for Auto Insurance

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Although every car insurance company has a slightly different way to come up with your car insurance rate, all of the major auto insurers look at the same basic categories of information in giving you a quote on what you will pay for your car insurance coverage.

The collect this general information from you when you first apply for insurance and then verify what you tell them through an underwriting process that relies on reports from credit reporting agencies and state insurance databases.

Here is some of the information you can expect to factor into your rates:

  • Your driving record
  • Your credit score
  • Where you live
  • What you drive
  • Who else lives at your house

There really is no point in being dishonest in your application to try to get a lower rate because the insurance company can check all of this information and could end up canceling your policy or denying coverage for one of your claims.

Your driving record is most definitely going to be a contributing factor to the rate you pay for car insurance.

If you have no accidents on your record or have not received traffic tickets within a certain time period, then you will probably enjoy paying a lower rate for car insurance than if you have been involved in a car wreck recently.

Also, if you do not have much of a driving history at all because you are a relatively inexperienced driver or are a teen driver who just got your license, you could be paying a more expensive premium.

Your credit score comes into play as well. Insurers are interested in your financial responsibility so that they are sure you will actually pay for your policy premiums.

Drivers with better credit scores are also considered less likely to file a claim under their car insurance policy.

The area that you live in will be considered for insurance purposes. If the area is unsafe and tends to have more traffic accidents than others, than the insurance company will probably charge you a higher rate for insurance because you are more likely to end up filing a claim.

In addition, the type of car you are driving matters in terms of how much you pay for car insurance. If your car is more exotic or considered to be a luxury vehicle, then it will cost more to insure.

It can actually be very difficult to find cheap coverage for a classic car or a modified car because they are so rare and more difficult to insure.

The other drivers in your house matter in terms of your risk assessment for car insurance.

If there are other drivers in your house that have a relatively good driving record and credit score, then you may want to consider listing them on your policy as a named insured. This might help to actually lower your rate.

On the other hand, if there are drivers in your house with poor driving records and a lower credit score, then you should ask about having them excluded from your car insurance policy.

Remember that for any excluded driver, he or she should not be permitted to drive your car at all because there would be no coverage for any accident involving them driving it.

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Optional Insurance Coverage

It may come as no surprise that your car insurance premium will increase if you elect to get supplemental coverage.

For example, collision and comprehensive insurance are not required under state law. They work to pay for damage to your own car, which is different from the coverage of an auto liability policy.

When you just have liability coverage, you are only protected for damage that you cause to another car or person in a car wreck.

Even though you might have to pay a bit more for supplemental coverages, they are worth checking into when you are getting insurance quotes.

For the collision and comprehensive policies, you end up paying a deductible, which is a fee that you pay out of pocket when you have to file a claim.

To get a lower rate, you can experiment with paying a higher deductible. If you do not end up filing a claim, this means a better overall savings for you because the premium is less for your policy term.

If you do have a claim, then you can always reduce your deductible at a later time so that you are not hit with as big of an expensive from your own pocket for a collision or comprehensive claim.

The Bottom Line on How an Auto Insurance Premium Works

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The premium is another word for the rate that you pay for car insurance. Your premium is quoted for a specific term of insurance, which usually lasts for either six or 12 months at a time.

The rate that you pay for car insurance will be different according to which company you are insured with and is based on a long list of factors.

One of the best ways you can guarantee that you are not paying too much for car insurance is to ask around for a few estimates on your premium before you choose any one car insurance company.

If you are interested in finding ways to lower the price of your car insurance, then you should ask your car insurance agent about discounts and be proactive about ways that you could cut the cost of your insurance without necessarily giving up the coverage that you need.

Compare rates today and see how much money you could save on auto insurance!

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