Have you ever wondered how car insurance premiums are calculated by their providers? If so, you’re not alone. Calculating car insurance costs is one of the biggest mysteries of the auto world. If you want to learn how to calculate your car insurance cost, you have come to the right place for information.
This article breaks down the process of calculating auto insurance premiums into digestible steps. So, the next time you’re asked, “How much is car insurance,” you know exactly how to get the answer yourself.
Before we dive into how you can calculate car insurance costs, let’s first look at what car insurance premiums are.
What Are Insurance Premiums?
Insurance premiums are essentially what you give in exchange for insurance coverage. Premiums are typically paid on a monthly or annual basis; however, there are other policies with more flexible terms, i.e., bi-monthly and bi-annually.
You can pay your insurance premiums using a variety of methods, from bank checks to paperless billing options. Costs will vary depending on a variety of factors, including your age, income bracket, driving history, coverage, and more.
How Much Is the Average Cost for Car Insurance?
Surveys show that the average cost for car insurance in the United States is around $1,771 annually for full coverage. As with averages, that’s hardly true for everyone who owns a car.
The costs of car insurance change on a case-to-case basis. In other words, if you and your friend got car insurance from the same company, there’s a high chance that both of you won’t get the same premiums for your policy. Thus, it’s much better to shop around and find the best provider for your specific situation. That way, you don’t end up spending more than what you need.
How to Calculate Your Insurance Costs
As mentioned earlier, insurance companies consider various factors when calculating your insurance premium:
Age
In a 2022 survey, it was found that around 67% of deaths related to car crashes involved drivers who were older than 65. Insurance companies use your age to calculate your risk as a policyholder. The older you are, the more likely you are to get into an accident. Thus, the more expensive your car insurance premiums tend to be.
Policy Type
There are several types of insurance policies. Most states only require drivers to have at least liability insurance; however, some states might require you to get more than one policy. Some people might also prefer to have more than one policy for safety reasons. Either situation can bring your insurance premiums up.
Location
The state in which you live will play a large role in how much your insurance premiums cost you. Renata Balasco at TheZebra notes that car insurance rates in Louisiana are a whopping 114% higher than the national average, sitting around $3,265 per year. Contrast that with New Hampshire, the only state in the country that doesn’t legally require auto insurance.
Coverage Amount
Insurance policies aren’t all-encompassing. They have their limits, which is why choosing your coverage carefully is important. After all, you don’t want to get stuck with an insurance policy that you can’t use in times of an emergency. That said, increasing your coverage can mean higher premiums for you as well.
Driving History
Reckless drivers are more likely to pay expensive insurance premiums than safe, defensive drivers. This is simply because reckless drivers are more at risk of getting into costly car accidents. A driver with a good driving history is likely to get more favorable rates.
Credit Score
Your credit score is one of the biggest factors that influence the rates insurance providers will give you. The more impressive your scores are, the better the deals you can receive. On the other hand, the poorer your scores, the more likely you are to get an expensive premium.
Types of Car Insurance and Affordability Comparison
Various types of car insurance coverage serve different purposes and come with different costs. Liability insurance, covering damage caused to others, is generally more affordable. Collision insurance tends to be pricier, focusing on your vehicle’s damage from collisions.
Comprehensive insurance, covering non-collision events, offers broader protection at a relatively higher cost. Uninsured or underinsured motorist coverage protects against inadequately insured drivers, adding to premiums. On the other hand, personal injury protection (PIP) or medical payment coverage increases premiums but is crucial for medical expenses.
Gap insurance, covering the gap between a car’s value and the amount owed, is often inexpensive. Rideshare insurance, designed for rideshare drivers, may be pricier due to specific coverage. Moreover, compulsory third-party or CTP insurance, mandatory in many places, covers injury claims against you, adding to costs.
Insurance companies offer different payment methods, such as direct debit, allowing the insurer to automatically deduct the premium from your bank account regularly. Many insurers accept payments through credit or debit cards. Some individuals still prefer to pay by traditional bank checks, although this method may be less common in the age of electronic payments.
To compare affordability, obtaining quotes from different providers and considering factors like deductibles, coverage limits, and discount eligibility is crucial for finding the right balance between cost and protection.
Tips to Lower Your Insurance Premium
While car insurance isn’t cheap, there are ways to lower your premiums so that you don’t have to pay more than you’re willing to pay monthly. One of the most common methods that drivers use is to bundle their insurance with their home or life insurance policies. You can do this if you get all your insurance policies from the same provider.
Alternatively, you can try increasing your deductibles or lowering your coverage. This method can bring your expenses down by a couple of hundred dollars. You could also try improving your credit score or your driving history.
The Bottom Line
Car insurance is undeniably one of the most important things a car owner should have. Besides protecting you from possible financial ruin, it can also extend your car’s life expectancy, as well as cover repair and replacement costs.
That said, car insurance costs can be incredibly unpredictable. It can be influenced by several external factors, such as your credit score, driving history, age, financial status, and more. Knowing what you could be charged for can help you avoid expensive mistakes—like buying the wrong insurance policy.
