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What Are Auto Insurance Premiums?

Seeing the word “premium” attached to any other word is typically a mixed blessing. It suggests something special and especially fancy (which is good), but with the implication that it’s going to cost you more to get it (which is bad). And when it goes next to a word like “insurance,” it’s especially intimidating. Thankfully, an auto insurance premium is a pretty simple concept. It’s the amount of money that you pay out of pocket for your policy for its benefits.

That bottom line is the main thing that most of us care about, anyway. How much is this going to cost us? Since there are many laws both on the federal and state levels when it comes to insurance of any kind, it gets more complicated once you start breaking down the specifics of how a company calculates your auto insurance premiums.

What goes into my premium?

Your premium isn’t typically a single charge, but a composite of several different ones. The primary one is a rate calculated by the company, determined by a multitude of factors. On top of this are various fees, such as service charges, which depend on local insurance laws as well as your provider’s company policies. The total is your premium: the annual cost to keep your vehicle covered, though most companies today allow clients to split the bill into quarterly or monthly payments, often with some kind of discount if you pay a chunk of it at once.

Let’s talk about that initial rate that makes up the bulk of your bill. Auto insurance premiums have a base calculation (as determined by law) that gives your provider a starting figure to work with, which is then raised or lowered by your personal information, location, company policy, and other particulars to get you your final total.

We’ll get to those factors shortly, but before we do, let’s go into a bit more detail on who calculates these numbers in the first place.

Who decides what my insurance premium will be?

Every auto insurance company works with a few different parties to determine what they can offer customers, namely actuaries and underwriters.

First, there are actuaries, who work for businesses to determine, based on geographic location and demographics, how costly any given accident could be. They must first figure out the overall likelihood that drivers will encounter risks on the road— essentially, anything that will cause damage or a loss of property. They use those figures to create a projection of how much money would typically be needed to recover from them. They then work with the insurance company to estimate how much money they’ll need to pay out for accidents, as well as how much money they’ll need to make a profit.

Underwriters work In conjunction with the actuary’s efforts. They evaluate the risk of insuring various types of vehicles and drivers to determine which of them is profitable for a company to cover. Once they determine that risk, they help the providers decide what kinds of coverage at what amounts they can offer.

So what factors influence my premium?

The short answer is a lot of them. Some of them are things that you can change as you see fit, while others are mostly the luck of the draw.

The more coverage (and/or more comprehensive coverage) you want to have, the higher the premium will be. Simple enough. You’re going to have to pay more if you want more services, and an insurance company will factor that into your bill if you want them to give out more money on your behalf when you get into an accident. And the more comprehensive your contract, the more likely or frequent your need to “cash in” on your policy is, so fees adjust themselves accordingly.

Of course, it is possible to pay less for a higher amount of coverage, but that requires you to place more risk on your own wallet. By raising your deductibles, you’ll be covering more out of pocket before the insurance company steps in.

Of course, there are those elements that you just have to make do with. Multiple pieces of personal information and history will have some impact on your premium, as they inform the insurance company of how much of a risk is posed to anyone including yourself by outside forces whenever you take the wheel, both to yourself.

Anything that indicates a lower risk will decrease your costs, while anything that suggests a higher risk will add to them. Some of these influences can include:

  • Age: The older you are, the more experience you have driving, and the less likely you are to have an accident.
  • ZIP code: In more rural areas and those with more temperate climates, drivers are less frequently dealing with accidents, vandalism, stolen vehicles, and weather damage, meaning they’re filing fewer fewer claims (some legitimate, some fraudulent).
  • Gender: Insurance companies view women as less aggressive drivers, and so tend to get in fewer accidents. Men in their late teens and early twenties are particularly likely to drive recklessly, and therefore pay some of the highest rates.
  • Marital status: Married couples are statistically seen as being less active on the road than single drivers, and can also receive discounts for combining their policies.
  • Driving record: Whether or not insurance companies rate you as a safe driver depends on the number of traffic violations and accidents you’ve been in. The fewer violations you have on your profile, the more likely your insurance company will see you as a reliable driver. Those without any violations typically get a “good-driver” discount as well.
  • Claims record: How many claims you’ve filed in the past and whether they were ones made at-fault or not-at-fault tells an insurance company how good the chance is that you’ll be filing at some point under your contract with them.

All the factors above only cover you as the driver. Your vehicle also has a deciding role, though it can be a bit more complicated. In general, older cars will cost less to insure than newer ones, as more current models have more advanced parts and technology that are more expensive to fix or replace, but this isn’t always the case. New vehicles may get a lower rate due to having better safety features, while older ones can get a higher rate because they’re more likely to be stolen with their lack of them. Purchase price, safety test results, rates of theft and accidents all play a part here, as does how you use your car. The more you drive, the more you’ll pay.

Paying what’s due

In the end, an auto insurance premium is pretty simple.It’s that bolded number at the bottom of your bill, the one that you’re going to have to put some of your hard-earned paychecks toward every month or so. Unlike your rent or yearly taxes, however, it’s one bill that you have some degree of control over, and it can change from year to year. New opportunities for discounts come and go, which is why working with your insurance company is vital. You can never be sure what will be available, so you need to be vigilant!


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