What Is a Car Insurance Premium?

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

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 likely 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 likely 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, like roadside assistance, will increase your premium, while cutting coverage, like limits to your liability portion, will lower it.
  • Discounts: Most insurance companies offer additional discounts for performing certain actions, like 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.

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.

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 like to pay—and you'll typically get a "paid in full" discount when you pay pay more upfront.

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.

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