What Is an Auto Insurance Premium?

A car insurance premium is the amount a particular company charges to insure a vehicle based on the information provided by the owner. So, the final amount depends on two main variables and they are; the insurer and policyholder. Not only does a different premium emerge each time one of them changes but also even a minute alteration in policyholder details changes the final price.

The company has its unique and proprietary process of gathering details, considering every little detail on a quote form, applying their rates and coming up with a price. And every applicant provides totally different details from the car’s make, model, age, engine size to number of drivers listed on the policy and their individual details, as well as zip code, credit score and coverage amounts.

Each part of a quote form gets marked in a way, rates, discounts and surcharges are applied and they are totalled up to get the final price. A premium is tailored to individual applicants, whose details are considered and priced.

Premiums signify policyholders’ end of the bargain. An auto insurance policy contract starts with the payment of the agreed first installment or full premium and can be cancelled if the next installment is missed. So, it is an integral part of the agreement.

A vehicle insurance premium is just a number that doesn’t answer many questions on its own. It doesn’t tell you why a company wants to charge you this amount or offer no insight on its fairness or competitiveness. Knowing how companies arrive at these figures can allow drivers to gain insight, which can help them to make the most of their strong points and reduce the effects of weaknesses.

Here are the key details considered by vehicle insurers in determining premiums;

Zip code is one of the first questions asked to determine which state rules are applicable. Every company has already rated every zip code and is ready to apply a weighting for it. Cars spend more than 95% of their time parked at the owner’s address. They are only out driving about 5% and even then, they often don’t go far. That is why auto vandalism and theft statistics, weather and traffic conditions in the zip code are very important inputs affecting every resident’s auto insurance costs.

Driving records of every driver included in the policy is checked and rated. What age they are, how long they have had driver licenses, what tickets they received and accidents they are involved in are all checked and priced. Younger motorists are considered high-risk and can raise rates a lot even if they are only listed drivers.

Details of the vehicle insured are very influential as different automobiles carry different insurance ratings. Its make, model, age, value and engine size help companies to determine the rates applicable. Everything being equal, you would be charged much more if you own a sports car in comparison with a family sedan. They are obviously more dangerous and they affect rates a lot.

Claim and Insurance History of the policyholder is taken into account as well. The longer they go without a claim and with continuous coverage the better. At fault collisions and too many claims raise a red flag and increase premiums a lot.

Coverage required is highly influential as well. For example, motorists pay on average 60% more for full coverage vehicle insurance in comparison to liability only policies. Choosing higher deductibles reduces the premium charged as well.

Credit score of the policyholder can change the premium about 20% up or down. Handful of states don’t allow use of credit scores.

Many other details are programmed into calculations like gender, marital and homeownership status and yearly mileage.

At the end, the company would determine if you are a high, low or acceptable risk for them and charge accordingly. Obviously, you cannot influence a large part of data used to determine car insurance premiums. However, the car is totally your choice and you can influence the credit score by being mindful about the bills and borrowing.

Premiums can be for a six month or a year depending on the length of the policy and can be paid in several installments or in one go. Most companies offer discounts for full payment upfront. And missed vehicle insurance premium payments can lead to policy cancellations.

Companies automatically recalculate a renewal premium at the end of each automobile insurance policy period. Most companies like their customers set an automatic renewal mandate, in which the policyholder agrees to the policy being renewed unless otherwise instructed before the due date and provide a payment method for the premiums to be taken automatically.

Naturally, carriers can change their prices and policyholders can choose another company at each automobile insurance renewal. Any negative change in the details above as well as inflation can cause premiums to go up. Qualifying for more discounts reduces the costs.

A car insurer first offers a quote based on details provided. This price would be highly reliable if all the information they received is accurate and would be open for about thirty days in most cases.  If the vehicle owner agrees, accepts and pays for it, a quote turns into a premium.

Companies make money from assessing the risks associated with driving and owning a vehicle. If they get it wrong they lose money and if they are good at their jobs they make profits. Contrary to common belief, many of them declare losses year after year.

So, it is clear that each automobile insurer has its own methods and applies different discounts at varying levels. What is important isn’t usually how many discounts they apply but how their quotes rate against other companies.