What Factors determine the Price of my Auto Insurance Policy?
According to the Insurance Information Institute, the average yearly auto insurance premium is around $800, but there is wide variation around this average.
Many factors can affect your premium, and these factors are based in statistics and insurers experience to help determine how likely you are to have an accident. These data points historically have done a better job predicting than just your driving record.
Not all companies use all of these factors, and some might use factors not listed here. Your premium may depend on, in no particular order:
Your driving record
- The better your record, the lower your premium.
- If you have had accidents or serious traffic violations, it is likely you will pay more than if you have a clean driving record.
- There have been many studies about the rate of speed vs. the seriousness of the accident, so a good risk management tool would be maintain appropriate distance between other vehicles as well as drive at or below the speed limit. This will help your driving record over time.
- You may also pay more if you are a new driver and have not been insured for a number of years.
Claims history/Prior insurance
- Your prior carrier and claims history are important factors that insurers use when they experience rate your policy. Similar to driving record, having a clean claims experience is to your benefit. If you are a new driver, the insurance company won’t have a claims history or prior experience to rely on.
- Companies are introducing loyalty bonuses to those customers staying with the insurance carrier for long periods of time.
How much you use your car and/or How you use the car
- The more miles you drive, the more chance for accidents.
- If you drive your car for work, or drive it a long distance to work, you will pay more.
- If you drive only occasionally—what some companies call “pleasure use”, you will pay less.
- If you have low usage, distance, or good time of day driving behaviors, you might want to consider Usage Based Insurance. Currently, companies like Metromile are the leaders in this space, but we think there will be new entrants over time. We think Waze will start offering UBI.
- In general, mature drivers have fewer accidents than less experienced drivers, particularly teenagers. So insurers generally charge more if teenagers or young people below age 25 drive your car.
- However, this phenomenon isn’t supported by statistics as the drivers get too old. Senior citizens may unfortunately lose the savings previously offered as a mature driver.
- As a group, women tend to get into fewer accidents, have fewer driver-under-the-influence accidents (DUIs) and most importantly less serious accidents than men.
- So, all other things being equal, women generally pay less for auto insurance than men.
- Of course, over time individual driving history for both men and women will have a greater impact on what they pay for auto insurance.
Your credit score
- For many insurers, credit-based insurance scoring is one of the most important and statistically valid tools to predict the likelihood of a person filing a claim and the likely cost of that claim.
- Credit-based insurance scores are based on information like payment history, bankruptcies, collections, outstanding debt and length of credit history.
- For example, regular, on-time credit card and mortgage payments affect a score positively, while late payments affect a score negatively.
- Maintaining a strong credit score, credit history, and low debt are goals that are not limited to insurance purchases.
- Statistics show that married drivers are involved in fewer accidents and are issued fewer tickets than single people.
- In some cases, insurers will even drop the rates of drivers under 25 if they tie the knot. Combining or bundling policies with your new spouse can also send your premium down. See our article on Marriage must knows and how to address marital status changes and your insurance.
- Auto insurance companies may also make correlations between a person’s risk of accident and their profession, and they can adjust your premium accordingly if they think you’re more likely to get in an accident.
- For example, delivery drivers and journalists are on the road constantly, and thus are more likely to be in an accident, whereas airline pilots often just drive between the airport and home, and don’t spend much time on the road.
- Others, such as police officers, paramedics, nuns, and insurance underwriters, often receive a good rate, as they are seen to be more careful than the average driver.
The vehicle you drive.
- Some cars cost more to insure than others. Factors like Safety rating, vehicle size, age of the car all are important…
- Variables include the likelihood of theft, the cost of the car itself is major rate factor, the cost of repairs, and the overall safety record of the car.
- Engine sizes, even among the same makes and models, can also impact insurance premiums.
- Cars with high quality safety equipment might qualify for premium discounts.
- Insurers not only look at how safe the car is to drive and how well it protects occupants, they also look at the potential damage a car can inflict on another car.
- If a specific car has a higher chance of inflicting damage on another car and its occupants, some insurers may charge more for liability insurance.
Where your car is parked and where you live.
- Where you live and where the car is parked can affect the cost of your insurance.
- Generally, due to higher rates of vandalism, theft and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas.
- Other factors that vary from one area or state to another are:
- cost and frequency of litigation;
- medical care and car repair costs;
- prevalence of auto insurance fraud;
- and weather trends.
The type and amount of coverage.
- Read your policy, compare the declarations page, and coverage limits.
- In virtually every state, by law you must buy a minimum amount of liability insurance. The state required limits are generally very low and most people should consider purchasing much more than the state requirement—the recommended amount of liability protection is about ten times the average state minimum. As we previously mentioned, we think an Umbrella policy is a no brainer purchase, so the amount of liability required may also be based upon a umbrella requirement.
- If you have a new or recent model of car, you likely will also buy comprehensive and collision coverage, which pays for damage to your car due to weather, theft or physical damage to the car such as being hit by a tree.
- Comprehensive and collision coverages are subject to deductibles; the higher the deductible, the lower your auto insurance premium.
- While there is no legal requirement to purchase these coverages, if you finance the purchase of the car or you lease it you may be required by contract.
Bundling discount or alumni/association discounts
- When you bundle auto insurance with homeowners, umbrella insurance, renters insurance, etc. You are bundling all insurance policies with one carrier, therefore lowering the insurance companies costs to acquire customers – therefore these decreased costs are passed through in the form of bundling savings.
- Again with alumni or association discounts, the insurance company has access to more customers at cheaper acquisition costs – therefore can implement savings.
Please note, insurers NEVER use race or religion to set rates. Such practices are illegal.
These items above are for your knowledge, we want you to get involved in your insurance purchases. However, as per our other articles, misrepresentation of any of the details to your insurance carrier can results in denial of claim. Our discussion about Misrepresentation will be covered under a separate article.
There is an important and distinctive line between being an InsuranceShark, navigating the risk and insurance ocean with confidence, skill and speed and using this knowledge to misrepresent. We can’t stress enough that honesty is the best policy and InsuranceSharks don’t need to cut corners to be the top of the food chain.