How auto insurance premiums are calculated

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How auto insurance premiums are calculated

Even the savviest car shoppers can forget to estimate car insurance costs before buying.

The type of car you drive is just one variable car insurance companies plug into their formulas to determine how much to charge you. Depending on the vehicle and insurance company, the cost of car insurance can vary by hundreds of dollars a year for the same driver.

That’s why it pays to get some initial car insurance quotes for models you’re thinking about buying. Along with gas mileage and maintenance costs, car insurance costs should be included when calculating the total cost of owning a car.

The national average car insurance rate is $1,427 per year for “full coverage,” according to NerdWallet’s 2020 rate analysis, but your rates will differ the car you buy, among other factors.

 Full coverage car insurance isn't a specific type of policy. Rather, it refers to a combination of coverages.

For our rate analysis, full coverage includes liability, comprehensive, collision, uninsured/underinsured motorist protection and any additional state-mandated coverage.

Why some cars cost more (or less) to insure than others

Certain cars cost more to insure than others because carriers use crash and theft statistics to help set rates for each model separately. So if the car you choose tends to be stolen or crashed more, chances are you’ll pay more for insurance. The reason sports cars cost more to cover, for example, is because they’re more ly to be driven fast and crashed hard by their owners.

Here are some specific characteristics that affect the cost of auto insurance:

  • Retail price. Generally, the pricier the car, the more expensive it will be to insure. Assuming you buy comprehensive and collision coverage, the insurance company will be on the hook to pay out the car’s market value if the vehicle is stolen or wrecked beyond repair.
  • Cost of parts. High-end models often use parts made from carbon fiber and other specialized materials that are expensive to repair, which drives up the cost of damage claims.
  • Safety. Over time, cars that do a good job of protecting drivers and their passengers bring down insurance costs. Fewer injuries mean fewer claims for medical payments and personal injury protection.

» MORE: Ranking the cheapest cars to insure

How to get car insurance estimates

In your search for a car, follow these steps for an accurate auto insurance estimate:

  1. Decide how much coverage you need. If you’re buying a new car, include collision and comprehensive, which cover damage or loss of the vehicle. If you get a car loan for a used car, you’ll need this coverage because the lender will require it. If you’re unsure, some insurers’ websites feature car insurance calculators to help you determine your coverage needs.

  2. Get quotes for the same amount of coverage for the vehicles you’re thinking about buying. NerdWallet’s car insurance comparison tool can help you get started.

Now you can factor in the cost of car insurance to help you make a final choice.

» MORE: Auto loan calculator: Estimate your car payments

Other factors that can affect your car insurance quote

Your car make and model aren’t the only factors that go into an auto insurance quote. Other factors that affect your quote include:

  • Personal characteristics age, gender and marital status. For example, teen drivers have higher car insurance quotes on average than any other age group.
  • The coverage you choose. The more coverage you have, the higher your insurance rates are ly to be.
  • Your driving record. A recent DUI, speeding ticket or at-fault accident can raise your rates.
  • Your location. Every state has different car insurance minimums, and factors your neighborhood's crime rate and population density will affect your insurance price.
  • Your credit score. Drivers with poor credit typically have higher car insurance rates. Insurers use a credit-based insurance score, which is different from your regular credit score, to determine the lihood you’ll file a claim. A credit-based insurance score looks at factors such as payment history and outstanding debt but can't use any personal information your income or occupation to determine your score. California, Hawaii and Massachusetts have banned insurers from using credit scores when calculating car insurance rates.
  • Your car insurance history. This can include whether your car insurance has lapsed, insurance claims, how long you’ve been with your insurer and your last insurance company.

» MORE: Car insurance quotes: What you need to know

How much car insurance do you need?

Most states require a minimum amount of car insurance, but you’ll ly want to have more than minimum coverage. Some drivers opt to get full coverage to help protect themselves against any type of accident.

Remember, full coverage isn't a type of policy, but generally a combination of required and optional coverages. But full coverage doesn't include everything.

Extras roadside assistance and gap coverage may have to be added separately.

» MORE: What does car insurance cover?

Full coverage car insurance may include:

Medical costs due to injuries or deaths from an accident you caused.
Property damage liabilityRepair costs for property you damaged in an accident.
Uninsured motorist bodily injury liability Medical costs after an accident with an uninsured driver.
Uninsured motorist property damage coverageRepair costs after an accident with an uninsured driver.
Repair expenses from traffic-related accidents, regardless of who is at fault.
Repair costs from events outside your control — including weather events, hitting an animal while driving, theft and vandalism.

How can I save on car insurance?

The best way to find the cheapest car insurance rates is by shopping around. Check car insurance quotes and look for a company with a good reputation for customer service.

When you shop for car insurance, remember to compare quotes for the same levels of coverage. A company that offers a particular discount might still be more expensive than an insurer that offers low-cost coverage overall.

Although the cost of insurance may not make or break your final car decision, it’s important to know how much you’ll pay for coverage before you make an offer on a vehicle.

Frequently asked questions

How can I get cheap car insurance?

The best way to find cheap car insurance is by shopping around for car insurance quotes. Look for a company with a good reputation for customer service.

When you shop, remember to compare quotes for the same levels of coverage and look closely at discounts. A company that offers a particular discount might still be more expensive than an insurer with generally low-cost coverage, but you have to get quotes to know.

How much should I be paying for auto insurance?

The national average car insurance rate is $1,427 per year for good drivers with good credit, according to NerdWallet’s 2020 rate analysis. However, an exact price is hard to estimate without knowing specifics about you, such as your driving record and where you live.

What is the cheapest car insurance company?

NerdWallet’s 2020 auto insurance analysis of the best cheap car insurance companies found that among the largest insurers, Geico had the cheapest car insurance quotes with an average of $1,198 a year. State Farm and Progressive offered the next-cheapest auto insurance rates, respectively.

While USAA had the cheapest auto insurance rates overall, it was not ranked because the company offers insurance only to active military members, veterans and their families.

How can I find the cheapest car insurance for me?

To find the cheapest auto insurance company you can, compare car insurance rates from at least three providers. Because rates depend on several factors including your driving record, age and gender, rates vary widely among companies.

Location can also make a big difference. To get a good benchmark for price comparisons, check out average rates in your state along with the car insurance cost calculator.


What Is a Car Insurance Premium?

How auto insurance premiums are calculated

Your car insurance premium is the amount you pay your insurance company on a regular basis, often every month or every six months, in exchange for insurance coverage. Once you've paid your premium, your insurer will pay for coverages detailed in the insurance policy, liability and collision coverage.

Every insurance company determines its rates differently, but your premium is typically details about you, the type of car you own and the coverages you select.

Comparing rates from multiple insurers is typically the best way to find savings on car insurance premiums.

Also important to note, auto insurance premiums are separate from your deductible, which is the dollar amount you must pay before your insurance will kick in. All types of insurance require you to pay a premium, not just auto: homeowners, life and renters insurance also require premium payments.

How are Car Insurance Premiums Calculated?

Insurance companies consider many factors when setting car insurance premiums. Every insurer's goal is to balance the amount it charges you with how ly you are to require an insurance payout.

For example, a 16-year-old boy in a brand-new sports car will pay much higher insurance premiums than a 40-year-old woman in a station wagon.

This is because the boy is more ly to be in an accident, and his car will be more expensive to repair if he gets in one.

Every insurer has its own secret, regularly updated formula it uses in order to calculate your premium. Here are some details your insurer may consider when setting your premium.

  • Personal Details: Your age, gender and where you live.
  • Credit and Driving History: The more responsible you have been in the past with your money and behind the wheel, the lower your premium.
  • Car Type: Newer, faster and more expensive cars have higher premiums across the board.
  • What Coverages You Select: Adding optional coverages to your insurance policy, roadside assistance, will increase your premium, while cutting coverage, limits to your liability portion, will lower it.
  • Discounts: Most insurance companies offer additional discounts for performing certain actions, taking a defensive driving course or paying for a year of coverage upfront.
  • Deductible Amount: The higher your deductible, the lower your insurance premium will be and vice versa.
  • People on the Policy: The more drivers you have on your policy, the more you'll pay each month.

Lowering Your Insurance Premium

Of course, some of these factors are harder to change than others, and some can't be changed at all. It's not realistic to move to a different city or change your age just to save money on car insurance. But you can usually customize your insurance policy to fit your needs and your budget, so long as you stay within the insurance requirements in your state.

One thing to keep in mind when customizing your coverage: Many insurance companies will show you a breakdown of your coverage, so you can make an informed decision about what will lower your premium while thoughtfully balancing risk.

Ultimately, every insurance company weighs variables differently, so the simplest way to lower your car insurance premium is to shop around at different insurers to see who will give you the best rates.

>> LEARN MORE: The Most Affordable Auto Insurers

The Difference Between a Quote and a Premium

When you receive an insurance quote from an insurance company, that's an estimate of how much the company will charge you for insurance. In order to balance precision with simplicity, insurance companies don't gather as much information when creating an insurance quote as they do when writing an actual policy.

For example, when getting a quote you might simply be asked if you have excellent, OK or poor credit. Once you've actually signed up for insurance, your insurer might calculate your credit-based insurance (CBI) score while determining your premium. Your rate could be better or worse than what was specified for your quote.

>> LEARN MORE: Understanding How Auto Insurance Quotes Work

How Often Do I Have to Pay My Premium?

Different insurance companies will ask you to pay your auto insurance premium at different intervals. The most common options are monthly, twice a year and annually.

Many insurance companies will let you choose how often you'd to pay—and you'll typically get a “paid in full” discount when you pay pay more upfront.

>> LEARN MORE: Car Insurance Discounts You May Be Eligible For

However, in some cases, you may be required to pay your entire term upfront. This is particularly common if you're deemed an at-risk driver—for example, if you previously let your insurance lapse or you require an SR-22. This is one way insurance companies reduce the risk of insuring at-risk drivers.

When Do Automobile Insurance Premiums Increase?

Car insurance is generally sold in either six- or 12-month terms. However long your term is, your insurance costs will stay the same for that term unless you make a change to your policy, such as if you buy a new car or move to a new house.

Once your term is up, your insurance provider will reassess how much your premium should be. If you were involved in an accident or were caught speeding, your rates might increase; alternatively, if you took a safe driving course, your rate might go down.

Insurers are also constantly adjusting their models for how much to charge for insurance, so it's possible your rate will fluctuate without any changes in your driving status at all.

>> LEARN MORE: Car Insurance Rate Increases


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