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How Is the Cost of Car Insurance Determined?

by Emilie Burke on
9/16/2024
in Personal Finance
Young woman standing outside car overlooking a mountainside.

Car insurance can be a big budget item, but it doesn’t have to be. Knowing how your premium is calculated can help you make better decisions about what kind of car to buy, how to manage your credit, and even where to live. Of course, there are some factors you can’t control, but knowing how to control the ones you can will help lower your premiums.

How car insurance policy prices are calculated:

What you drive

  • Make and model
  • Safety features
  • Age of car

The type of car you drive can be a big factor in determining how much your insurance is going to cost. Cars are ranked on safety features and discounts are offered for cars that are consider safer to drive. Features like extra airbags, anti-lock brakes, and anti-theft devices are typically all considered as part of the calculation.

On the flip side, flashy cars that are more susceptible to damage or theft will increase your premium. Do your research before buying a car. Check the safety ratings and find out how frequently that model is stolen or how costly it is to repair. You can always ask your insurance company for quotes on a few different cars to help you make up your mind.

Where you live (and drive)

  • Urban versus rural
  • Accident rates
  • Crime rates
  • State requirements

If you live downtown or an area with a high crime rate, your premium will likely be higher than if you live in a small town or suburb. Moving out of the city may mean driving more miles, but your rate could still be lower if you’re in a low crime area.

Additionally, states may have requirements around coverage minimums, which can also increase the price of your policy.

How you use the vehicle

  • Average daily commute
  • Purpose (personal use or business use)

If you work from home and don’t need your car very often, your premium will be less expensive than if you work in a big city 20 miles from home and fight traffic both ways. The more miles you add to your odometer every year, the more likely you are to have an accident which equates to higher premiums.

If the car is used for business (such as ridesharing) that can bump the premium up even more.

Your history and profile

  • Age
  • Gender
  • Experience level
  • Driving record

Your age, sex, and marital status can play a part in deciding your premium. Drivers under 25 are more likely to have accidents, especially single males.  

Your history of accidents and claims over the last several years can determine if you’re a good risk or not. Those with crash-free driving records for at least 3 years are more likely to have a less expensive insurance policy than those who have had even one accident or claim. 

Your coverage type and amount

  • Type of coverage
  • Amount of deductible
  • Discounts

Lower deductibles and more coverage will increase your premiums. Choosing a higher deductible will help lower your premium, just make sure that you can cover your deductible if there’s a problem.

Consider all options and how much you need each one before adding it. Look for all available discounts programs, like safe driver and good student discounts. Also consider bundling your insurance. Having your home and auto insurance together will lower your premiums for both.

Your credit history

For many insurers, a high credit score is considered a sign of financial responsibility and lower risk. As a result, a good credit score can often help you nab lower premiums on your car insurance policy.

While some factors are out of your control, choosing a car based on safety ratings, living in a safer area, raising your deductible, managing your credit, and driving your car less frequently can all play a significant part in lowering your car insurance premiums.

Looking for more tips and ideas to reduce the cost of car insurance? Check out our Ultimate Guide to Saving on Car Insurance!

Tagged in Insurance, Cars and car loans

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.

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