Are you looking for a new, more affordable auto insurance, or you are just curious about how are premiums calculated? Then you came to the perfect place.
Our co-founder Tony is a licensed insurance agent in Oregon, and he helped us explain how a customer should customize a policy to fit his needs. Our editor in chief Nikola is a former assistant underwriter, and he gave us an insight into how insurance companies assess risks and determine rates.
We combined their knowledge to give you a guide on how car insurance works and implemented our car insurance calculator to help you compare rates in no-time.
How Are Car Insurance Premiums Calculated?
The general premise of car insurance is simple. An insurer will charge you based on how much risk you carry. In the real world, things are a bit more complicated.
In states where price optimization is still legal, insurance companies will try to bill you as much as they can. They’ll use advanced software such as Earnix, to calculate the maximum amount you are ready to pay for car insurance. Then they’ll send you a check with that amount.
Even in locations where price optimization is prohibited, there are more factors than just your claim-making potential. Professional insurance estimator will also take state-laws, costs of running a business at a certain location, and other miscellaneous factors into account.
Additionally, different insurers employ different strategies. For instance, if a company made a significant profit recently, it’ll cut its prices to expand its market share. Then it’ll increase them again when it acquires sufficient number of new customers.
Nonetheless, there are many factors under your control which influence the final premium. Each car insurance estimate tool will prompt you to input this information, such as zip code, date of birth, driving experience, etc. Our research confirmed that they really do have a substantial influence over the premium. See below how each of these factors affects the rates.
The car you drive has limited influence on your premium unless you select collision and comprehensive coverages. These two protection plans would cover your vehicle if it was damaged in an accident or while it was parked, regardless of fault. If your car is more expensive than average and you select these coverages, your premiums will increase substantially.
We compared insurance rates by car with these two coverages selected for a 40-year-old driver in Fresno, California. We found that insurance for 2018 Audi A5 ($38,000 fair price) is 80% more expensive than for 2005 Toyota Corolla ($3,500 fair price).
Your driving record also has a significant influence over the final price. After all, past violations and accidents are a strong indication of your driving habits. Insurers simply have to charge drivers with a bad driving record more to protect their profits.
We got an Allstate quote for a driver with a clean driving record and one with three minor citations. Our results indicate that the latter needs to pay 45% more for his insurance.
We also tried to get a quote with a severe violation and an at-fault accident, but the Allstate’s quoting system took us to another car insurance estimator. This means that, if your driving record is strikingly bad, you’ll have a hard time finding insurance. Nonetheless, many states, such as Georgia or Ohio, offer an automobile insurance plan that’ll help you find an insurer.
While not directly related to the risk you carry, your location still has a significant bearing on the premium. The insurers have access to statistics on how frequent are car accidents, how many drivers are uninsured, and what’s the theft-rate in your area. They’ll use these to adjust premiums to match your zip code.
Additionally, they’ll take into account how much does it cost to run a business from a particular location. That’s why every car insurance payment calculator asks you to input your zip code first.
We decided to test how much your zip code influences the premium by contrasting two extremes. We got two same quotes from State Farm. The only difference was that one driver was living in a prestigious part of Los Angeles, CA, while the other resided in Wilmington, NC. As a result, the driver in the City of Angels had to pay 110% more.
Your age and time spent behind the wheel are something you do not have control of, but they can affect your rates drastically. And there’s a good reason for that. A research from 2012 indicates that a young driver is nine times more likely to cause a crash than an experienced one. That’s why every car insurance cost calculator will ask you when you were born, as well as at what age did you get a license.
Our first research included getting full coverage quotes in Austin, Miami, Chicago, Berkeley, New York City, and Boston. We found that the monthly premiums are more than 50% lower by the time a driver reaches 21.
Our second research included seven biggest insurers in Nashville, TN. We found that drivers aged 35-55, who are at the peak of their driving ability, pay the lowest prices. Senior drivers’ reflexes and sensory capacities start to diminish, and that’s why insurance companies start increasing premiums again after 65.
Standard car insurance calculator will not ask you about your credit rating while generating a quote. However, you can bet that insurance companies will look into your credit history and your auto insurance score. That’s because of an extensive study by The University of Texas, which found a strong statistical correlation between low credit rating and a high likelihood of making a claim.
We could not verify by a quote comparison how much a bad credit rating increases the premium. Nonetheless, research by other experts indicates that bad credit rating can increase your premium by as much as 90%.
How Different Coverages Affect Your Car Insurance Price?
Your car insurance policy consists of some of the six basic coverages and the optional protection plans you may add. Understanding how these affect the premium will help you get the better auto insurance estimate.
That’s why we got sample quotes for our reference 40-year-old driver with 2018 Honda Accord, to determine how premium expenses are distributed.
Carsurance Sample Quote:
- Liability: (BI/PD) $50k/$100k/$50k
- Uninsured/Underinsured Motorist BI: $50k/$100k
- Medical Payments: $5k per person
- Comprehensive: $500 deductible
- Collision: $500 deductible
- Rental Car Reimbursement: $30 per day ($900 maximum)
- Roadside Assistance: Coverage Selected
The first one was in Los Angeles, California, which is an at-fault state. The prices listed are for a six-month period.
Additionally, we conducted another study in Miami, Florida, which is a no-fault state. We entered the same limits in the insurance calculator as in LA, including the liability coverage bodily injury section, even if it was not mandatory. The only difference was that we picked PIP coverage with full benefits and no deductible.
Notice how collision is less expensive in Miami than in Los Angeles because it’s a smaller city with cheaper repair facilities.
What They Cover and How Much Car Insurance Do You Need?
Now that you know how much each coverage costs, it’ll help you also to know what protection they provide.
This is a bread and butter of auto insurance and coverage that’s mandatory in almost every US state. It means paying the damage you’ve inflicted to others. It has two separate limits. The first one is bodily injury, which reimburses medical payments, pain and suffering, lost wages, and similar outlays. This limit has a maximum payout per person and per accident.
The second one is property damage, which covers the repairs of a vehicle and stationary objects you hit. Furthermore, it may include personal belongings like a watch, smartphone, or tablet.
Despite being mandatory, liability is the most expensive car insurance coverage, along with collision. In our insurance estimate for our sample car (2018 Honda Accord), it was the coverage with the highest cost in the no-fault state and the second most expensive in an at-fault state.
Uninsured/Underinsured Motorist Coverage
If you did not cause the accident, it’s the other driver’s liability insurance that pays your medical and property expenses. However, you’ll be in trouble if their limits are insufficient or they don’t have car insurance at all. That’s where uninsured/underinsured can help. Depending on the state, it pays for the treatment of your injuries, your damaged vehicle, or both.
No auto insurance calculator will let you pick higher limits than your liability coverage. That’s because this protection plan is relatively inexpensive, and insurers do not want you to stack up this coverage and pick the lowest liability limits. Given this restriction, we would choose uninsured motorist limits equal to liability.
This insurance plan would cover your vehicle if it was damaged in an accident no matter who was at fault. Collision coverage must carry a deductible, and it pays up to the actual cash value of your car, which is the cost of an equivalent vehicle on the used car market.
If you play with any car insurance calculator, you’ll see that adjusting collision deductible has a significant influence over the price. Still, we recommend choosing at least $500 for optimal protection.
This coverage is a natural extension of collision insurance. It covers damage to your vehicle that did not come from a car accident. It includes natural disasters, fire, theft, vandalism, falling objects, and even a collision with an animal. The payment is up to the actual cash value of your car, and a deductible is optional. Since comprehensive is much cheaper than collision, we would consider no deductible variant.
Personal Injury Protection is optional in some US states, unavailable in many, and mandatory in no-fault states. It covers your and your passengers’ medical-related expenses up to the limit regardless of who was at fault. In total, insurance companies estimate that PIP can reimburse up to 80% of your injury-related expenses after an accident.
You may often find that you can’t change the PIP’s limits but only adjust the deductible in a car insurance estimator. That’s because the state laws prescribe the PIP limit. Still, we would choose a lower deductible for higher protection.
MedPay is always an optional coverage, and you can buy it without any deductible. It includes expenses besides injury treatment, such as pet walks, childcare, lost wages, and similar outlays.
When you estimate how much car insurance might cost, it can happen that your regular health insurance covers you after a car crash. Be careful, though. In some instances, your regular policy may carry an endorsement that excludes vehicle-related outlays.
Rental Car Reimbursement
If your car has been damaged in a covered accident, this protection plan can help. It pays the expenses of a rental car while yours is being repaired. It has a daily limit, usually starting at $30, and the total maximum payout, usually starting at $900.
This is inexpensive coverage that reimburses for roadside repairs and helps restart your car. It often includes flat tire changes, fuel and oil delivery, towing, battery jump starts, and locksmith services.
People Also Ask
Some of your personal information, like date of birth or your zip code, are essential for estimating your risk potential. That’s why, to get an accurate quote, you’ll have to provide this information to the insurer. Furthermore, every company will ask you about your email or phone number so that they can contact you.
Still, in our quote comparisons, we found that some insurers are more curious about your personal data than others. Progressive is among the insurers that respect your privacy the most.
There’s no insurer that’s cheapest for each customer. Auto insurance quotes are highly personalized, and many different factors influence the final price.
That being said, we estimate that car insurance from Geico is going to be among the cheapest options in your quote comparison. That’s because it was the most affordable, along with Progressive, and Erie, in each of our state-wide studies.
We would advise checking this by comparing quotes from multiple insurers. Because so many different factors influence the prices, it’s hard to say which company is the cheapest for everybody.
Nonetheless, Geico, Progressive, Erie, Farmers, USAA, and Mercury are usually among the most affordable options in our studies.
We recommend full coverage to all customers who can get it at a fair price. Only to new drivers, we would suggest skipping collision and comprehensive since insurance prices are exuberantly high for this demographic.
The average price of car insurance in the US is $119 monthly. However, this number does not mean you’ll pay something similar to $120 per month. Your zip code, age, driving experience, credit rating, and other factors will influence your premium.
That’s why it’s best to check your rates using a reliable car insurance calculator.