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If you’re buying car insurance for the first time, you may be curious how insurance companies determine your premium — which is the amount you pay in order to have insurance coverage for your vehicle.
The cost of your car insurance premium may vary since it’s based on a number of different factors, including your driving record, how much you drive, the types of insurance coverage you choose and even your age.
Let’s take a look at how a car insurance premium works, the average insurance costs and the factors that can affect your insurance rates.
- How does a car insurance premium work?
- How much does it cost to insure a car?
- What factors determine your insurance premium?
How does a car insurance premium work?
Your premium is the amount of money you pay to an insurance company to provide insurance on your vehicle.
Your car insurance premium may be paid monthly, every six months, or even just once a year, depending on the payment options your car insurance company offers.
In exchange for your auto insurance premium, your insurance provider will provide you with the coverage outlined in your insurance policy.
Your car insurance premium costs are based partly on the types of insurance coverage you choose, but other factors can affect your total cost (more on that later).
In every state except New Hampshire, you’re required to have a minimum amount of coverage. This can help protect your wallet by covering costs — up to the coverage limit outlined in the policy you choose — for example, to cover injuries or property damage you cause another driver in an accident.
Keep in mind that your car insurance premium is different from your deductible. The insurance deductible is the amount you pay out of pocket on an approved claim before your insurance kicks in.
How much does it cost to insure a car?
The average liability insurance premium nationwide was about $644 in 2018, according to the 2021 Auto Insurance Database Report from the National Association of Insurance Commissioners, or NAIC. Averages varied from state to state, with a low of just under $308 in North Dakota and a high of more than $1,015 in Louisiana.
The cost of your car insurance premium can depend on a number of different factors — some of which you can control (for example, where you live or the kind of car you drive) and some that are out of your control (such as your age).
What factors determine your insurance premium?
Here are some of the factors that could affect your car insurance rates.
- The types of auto insurance coverage you get — Are you buying only liability coverage, comprehensive or collision coverage, or even full coverage? More coverage will likely mean higher premiums. And choosing high coverage limits and/or low deductibles will likely drive up your cost of car insurance, too.
- Your driving history — Are you an experienced driver without any blemishes on your record? Or do you have a few tickets and an accident or two in your driving history? Even the amount of time you’ve been driving can affect your insurance premium.
- Where you live — Urban neighborhoods often have higher rates of accidents, vandalism and theft than rural areas, so your car insurance may be higher if you live in a big city.
- Your age — Younger drivers often pay more for insurance coverage because they have less experience on the road and are at higher risk of being involved in an accident.
- The type of car you drive — When determining your premium, insurance companies consider a few factors related to your car, such as the cost to repair it and overall safety record. But if your car has safety equipment, you might qualify for an insurance discount, depending on your insurer.
- Your credit history and insurance score — Insurance companies use your credit-based insurance score to predict the likelihood of you being in an accident and filing a claim. But note that California, Massachusetts and Hawaii have all banned the use of credit-based insurance scores in determining insurance premiums.
- Your mileage and driving behaviors — Do you have a long daily commute, or do you only drive to run errands on weekends? The more you drive, the higher your premium could be.
With so many factors affecting your car insurance premium, be sure to shop around for car insurance. Gather and compare insurance quotes from multiple auto insurance companies to help you find the best coverage and rates for your needs.
And be sure to ask about any potential insurance discounts or other ways you may be able to bring down the cost of your car insurance premium.