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How does the Insurance Company Determine my Premium?

by Erica Farmer
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insurance

The expenditure on using a car is on the rise. Gas prices are getting higher by the day, and the cost of fixing a car for something minor is unbelievably high. But that’s not all the places where you’d have to take out your credit card. Car insurance policies are as important as your car. Liability coverage, collision damage waiver, personal injury protection, and the list goes on.

 

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Car insurance policies require you to pay insurance premiums regularly to keep your policies active. But you have noticed that different people are charged differently when it comes to premiums. Not just that, but if you have two auto insurance policies, you might notice some difference in the premium rates.

Why do insurance companies set different rates for insurance premiums? More importantly, how does the insurance company determine your premium rates? This article will answer all these questions in detail. But first, let’s briefly understand what insurance premiums are.

 

What is Car Insurance Premiums

Just like when you buy a car, you need to keep paying for gas, car insurance policies are very similar. Not only do you have to pay an upfront cost to buy car insurance policies, but you need to regularly keep paying some money to keep those policies active. Auto insurance policies are valid for around 6 months or 1 year, and after the policy period expires, you need to renew it. This renewal price is your insurance premium rate.

 

Factors that Determine Insurance Premiums

 

Coverage Limit

Your car comes with a coverage limit. This is the amount your company will pay at max, and not a penny more for an insurance claim. A higher coverage limit means you’ll get a higher payout. But the downside is policies with higher coverage limits increase your premium rates.

Even though your premium rates will increase with a higher coverage limit, it is recommended that you should keep your coverage limits higher than your state’s minimum coverage limit. It is better to pay a little extra than be underinsured.

 

Deductibles

Deductibles are perhaps the most impactful factors that decide your car insurance premium rates. Higher deductibles will decrease the premium rates, while lower deductibles will increase them. You can select your deductibles rates based on your preference.

For the people who do not know what insurance deductibles are, it is a certain amount of money that you need to pay first in an insurance claim before the car insurance company pays the rest of the money.

For example, if your deductibles are $1,000 and the total cost of car repairs/property repairs is around $7,000, then you’ll have to pay $1,000 from your pocket and the car insurance company will pay the rest of $6,000. If the cost of repairs is under $1,000, making a claim is not possible.

Higher deductibles will reduce your premium rates, but if you get in a car accident, it might cost you a lot. A lower deductible will help you pay less from your pocket but it will increase the cost of insurance premiums, making you spend more money in the long run.

 

Age

Age is one of the strongest factors in determining the rates of accidents. A majority of road accidents in the US are caused by people under the age of 25. So if you are young, or a teenager, be ready to pay a lot in car insurance premiums.

Since young people are statistically more likely to be in a car accident and make a claim, car insurance companies charge them more upfront for policies, which also increases the premium rates. This is combined with another factor, credit score, which increases the rate even more.

 

Miles Driven

How many miles your car has been driven also impacts your car insurance premium rates, but only if you opt for pay-per-mile or usage-based car insurance policies. The more you drive, the more you have to pay, and vice versa.

 

Location

Location is also a key factor in determining your car premium rates. Let’s consider comprehensive first. Comprehensive coverage covers the cost of repairs for damages due to riots, vandalism, floods, fires, earthquakes, hailstorms, projectile damage, theft, etc.

So the premium rates for comprehensive coverage are affected by your location. If your area has higher rates of crime, theft, accidents, or is prone to get affected by certain natural calamities like floods, earthquakes, hurricanes, etc, your premium rates will be higher.

For other policies, your state’s labor cost and other factors can affect the premium rates. This is why you need to make the correct choice when buying a car. For example, if you live in Georgia, look for the best cheap car in Georgia and select the car company with the best coverage options.

 

Driving Record

Driving record is another important factor that affects your premium rates. People with a bad driving record pay the most for car policies and premium rates. Even something like a speeding ticket can increase your premium rates by a lot.

Driving under the influence, rash driving, accidents, etc can increase your policy and premium rates by 400% This is why it is important to maintain a clean driving record if you want to keep premium rates low. A bad driving record can easily ruin your chances of getting low premium rates.

 

Credit Score

It might sound unlikely, but a majority of the states in the US use credit score as a factor in determining your premium rates. People with poor credit scores are charged more for premiums. This is because a poor credit score makes it more likely that the policyholder might miss premium payments. Many states such as California, Massachusetts, etc have put a stop to the use of credit scores for determining policy premium rates.

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