How Auto Insurance Determines Premiums
Car Insurance Calculates Cost of Premiums Using a Variety of Factors
Apr 4, 2009
Drivers who pay their monthly bill to their auto insurance often wonder why the cost of auto insurance is so high. Perhaps they’ve been faithful to pay their bills every month. Perhaps they’ve received no moving violations, and have not been in a traffic accident in their entire life. Yet still, the cost of auto insurance seems unreasonably high.
Auto insurance factors in a number of considerations when calculating the cost of auto insurance premiums. On average, drivers pay around $900 per year for auto insurance. The reasons vary from the motorist’s driving record to coverages and discounts to the type of car the motorist drives.
Can the Cost of Auto Insurance Be Reduced?
Auto insurance costs can be reduced by taking simple measures including adjusting coverages, raising deductibles, and tweaking payment limits. All coverages are optional with the exception of liability, which is mandatory in all 50 U.S. states. Collision, comprehensive, medical payments, and uninsured/underinsured auto insurance can be declined if the driver so wishes. Personal injury protection (PIP) is optional in most states, but mandatory in no-fault states such as Florida and New Jersey.
How Auto Insurance Companies Calculate Premiums
- Coverages. Auto insurance calculates premiums based on the number of coverages selected by the driver, deductibles, and payment limits. When the driver purchases an auto insurance policy, he or she is advised by the auto insurance as to coverages. The more coverage, the greater the cost. However, drivers can elect to raise deductibles and lower payment limits which reduces the cost of the auto insurance.
- Discounts. Auto insurance provides discounts for car safety features including daytime running lights, airbags, and theft prevention systems. It also provides discounts for multi-car auto insurance policies, customer loyalty, and in some states, driver safety courses.
- Number of miles driven. Drivers pay more when they put more miles on their car annually because it increases risk. Most auto insurance companies provide discounts for low mileage.
- Driving record. Drivers with of record of auto accidents, citations, and moving violations generally pay more on auto insurance.
- Age. Auto insurance companies charge higher premiums for teenagers. If the teenager’s driving record remains accident free and without traffic tickets, that cost will eventually lower. On the other hand, mature drivers are charged less for auto insurance.
- Location. Drivers who live in a city where auto accidents, theft, vandalism, and natural disasters are statistically more frequent are charged more for auto insurance premiums. Living in a city where speeds are higher also results in higher auto insurance premiums.
- Type of car. Auto insurance charges super-high premiums for expensive sports cars due to vastly increased risk. Teens who drive a small sports car will see a major increase in auto insurance premiums, as do motorists with smaller SUVs that have a higher risk of rollover. Theft and vandalism statistics are also factored into auto insurance premiums as are the car’s safety features and the cost of repairs.
Auto insurance calculates premiums on a number of factors including coverages, discounts, number of miles driven, driving record, age, location, and type of car. It is highly recommended that motorists review their auto insurance policy and discuss how to reduce their auto insurance premiums with their auto insurance. Chances are, a significant amount of money can be saved per month by making simple changes to coverages, payment limits, and deductibles.
See related articles, “22 Easy Ways to Save Money on Auto Insurance,” "How to Choose an Auto Insurance Company,” and “Auto Insurance: Car Safety Tips for Drivers.”
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