For many people, the way the premium on an auto insurance policy is calculated is an absolute mystery, and many think that insurance companies must have some kind mysterious, complicated formula they use in order to create the highest premiums possible for their customers. The truth is, your auto insurance premium is calculated based upon factors that you, for the most part, have complete control over. Even if you think that your insurance premium must be incredibly high, it’s worth considering that according to The Insurance Information Institute, the average American pays approximately $795 a year in auto insurance premium. While premium amounts typically change every time your policy term renews, the same factors are considered, and most are dependent upon your past and present actions. Here are three of the main factors considered by insurers when calculating your premium:
Where You Live
Where you reside plays a huge factor in how much you pay in auto insurance premiums. The reason for this is because insurance companies take into consideration the area you live in and what certain statistics and also what life is like in general there. For example, if you live in a busy city where there are tons of vehicles, and where crime rates are higher, then you’d probably be looking at a larger premium because you’re at a higher risk for experiencing a loss from accidents or theft and vandalism. Additionally, insurance companies consider where you live in relation to where you work to determine how long your commute is, which obviously plays a factor since the more you’re on the road, the higher your risks for accidents are, and as far as where you live, if you live in an area where you have to drive into a larger city and leave your car there for hours, you’re at a higher risk for exposure to theft, traffic accidents, and other occurrences. Obviously, living in a larger city would also increase your premiums for the same reason, versus living in a suburb where there are statistically less risks. Additionally, the very home you live in can play a factor. For example, if you live in a home with a garage, this can reduce your premium since your car can be protected, versus if you live in an apartment in a city where your car has to be parked on the street.
This is a no-brainer. If you put a sixteen year old on your policy who has no experience driving, you’re going to pay more in premium since this driver isn’t experienced. Insurance relies heavily on statistics when calculating a premium, and statistically, younger drivers between the ages of 16 to 19 have more accidents. Additionally, credit plays a factor in your insurance score, which plays a part in your insurance premium, so since younger people don’t have much credit or often no credit at all, this lowers their credit score, which lowers their insurance score, which results in a higher insurance payment. Additionally, states have laws that define what a ‘youthful’ driver is: for example, in Virginia, a female is considered a youthful driver until the age of 25 or until married, and men are youthful drivers until 30 or married, which also means marital status has a small effect on premium.
This is one of the biggest factors used when determining your insurance rate. It’s well known that how many accidents and violations you’ve had affect your insurance rate, and not only do the number of accidents and violations you’ve had count as driving habits, whether you drive your vehicle for a work commute or whether you use it for pleasure only (such as if you’re retired) are considered driving habits, so this plays a large part in it. Essentially, the more you drive your car, the higher your risks are for an accident, resulting in a higher premium.
While there are many more factors used to determine your premium, such as the type of vehicle you drive and your occupation, these three factors play a large part in what you pay. Talk with your insurance agent to determine what you can do to lower your rates, and be sure to ask about discounts you may be eligible for to help alleviate the costs. Some things you won’t have control over, such as your age, but you can always become a better driver and look forward to the day you live in lower risk area or drive your car only for pleasure.