Nearly all states require drivers to maintain some level of auto insurance coverage. These policies provide liability protection for other drivers and may also offer you coverage for property damage, personal injury, and even medical payments. With the average cost of auto insurance premiums rising every year, though, you might find yourself asking how are auto insurance premiums determined?
Here’s a look at the 10 biggest factors that go into calculating auto insurance premiums and ways you can potentially save money on your next policy.
How Much Does Auto Insurance Cost?
The average auto insurance premium in the United States is just over $1,070 per year, according to the most recent data from the National Association of Insurance Commissioners (NAIC). This comes out to about $89 per month for coverage.
These numbers are calculated using policy premiums from 2019, however, so it’s likely that the national average has since increased.
Top 10 Factors Impacting Your Auto Insurance Premiums
Each carrier has its own proprietary methods for calculating driver risk and, in turn, the policy premiums it charges. However, there are a few important factors that will almost always be considered and can influence the price of your coverage.
Location
Where you live plays a very important role in your auto insurance premiums. Carriers consider your state’s laws and minimum coverage requirements for drivers, which can vary pretty wildly. The more financial risk the carrier takes on, the more you can expect to pay.
Carriers will also factor in the likelihood of your vehicle being damaged or stolen. If you live in a state with frequent natural disasters or higher than average rates of motor vehicle accidents, you will likely pay more than a driver in another state. You may also pay more for living in an urban area where car theft or hit-and-runs are more likely, compared to living in a gated suburban neighborhood or rural town.
Driving Record
Of course, one of the biggest factors that goes into calculating your premiums is your own personal driving record. The safer you are behind the wheel, the lower you can expect your premiums to be.
For example, a driver with multiple moving violations and/or at-fault accidents will likely pay much more for coverage compared to a driver who’s never even gotten a ticket. And understandably so: According to the National Highway Traffic Safety Administration (NHTSA), speed was a factor in 29% of traffic fatalities in 2020.
The types of citations you’ve received also matter. When determining how high-risk a driver is, someone with a minor speeding ticket won’t be as impacted as someone with multiple DUIs or reckless driving charges.
Age
The older and more experienced you are behind the wheel, the less risk you are likely to pose to an insurer. For that reason, you may find that your premiums are higher when you are a young driver, then level out for a few decades. They’ll likely increase again when you get older; that’s because crash rates rise sharply again for drivers 70 and older.
As you can see in this chart provided by the National Safety Council, drivers under the age of 34 account for the vast majority of accidents.
This visual doesn’t tell the whole story, though: Even though individuals between the ages of 16 and 19 only account for 3.6% of drivers on the road, they are responsible for 9.3% of all crashes and 6.3% of all fatal crashes.
As you get older, you become not only more mature but a more experienced driver. For this reason, you can expect your premiums to go down as you age.
Sex
For many age groups, men and women have similar auto insurance rates on average. For younger groups, though, male drivers may find that their premiums are notably higher than their female counterparts.
Carriers appreciate statistics, so it shouldn’t be surprising that this is rooted in data. Male drivers tend to clock more miles and, especially in younger age groups, engage in riskier behaviors behind the wheel. Men are also more likely to be involved in a fatal crash, according to the latest data from the Insurance Institute for Highway Safety (IIHS).
Your vehicle
It stands to reason that the more expensive your vehicle is, or the more likely it would be to cause serious damage to another vehicle, the more you’ll pay for your coverage. You may also pay more if your vehicle is a sports car or is statistically involved in more accidents.
If you’re buying comprehensive coverage for your own vehicle, you can expect your carrier to charge higher premiums if you own an $80,000 car than if you own a $20,000 one. Similarly, a small coupe may cause less damage in an accident compared to a full-size SUV, so you may pay more for a bigger and heavier car.
Credit history
When you think of auto insurance, your first thought probably isn’t your credit score. But what you may not realize is that your credit history is often considered when calculating your policy’s premiums.
If you’re a creditworthy consumer who pays their bills on time and manages their debt, you’re generally regarded as more responsible and less risk. However, if you have a history of defaults, late payments, and are carrying around a lot of debt, carriers might view you as less responsible. And while that doesn’t necessarily translate to your driving ability, it will impact an insurer’s overall view of your risk level.
Carriers cannot deny you coverage based on your credit history alone. They can (and do) adjust your premiums according to the results of a soft credit inquiry, though.
Claims history
Carriers would really prefer that you pay for insurance and never actually use it. After all, every validated claim costs them money, so it’s easy to see that drivers with a history of claims against their insurance will probably have higher premiums than those without any claims.
This technically only applies to claims against your own carrier, such as at-fault accidents or hit-and-run damages filed against your comprehensive coverage. The more claims you’ve filed, the higher your premiums will be. In some cases, you may even find that your carrier will drop you (or you can’t find new coverage) after too many incidents.
Coverage options
Nearly every state has minimum liability coverage or personal injury protection (PIP) requirements for drivers. You must carry at least this much coverage — or in some states, be able to prove financial responsibility — in order to be a legal driver.
This coverage only kicks in to pay for damages and injuries that you cause to others, though. If your own vehicle is damaged in an at-fault accident, you’re hit by an uninsured or underinsured driver, or someone side swipes your car in the middle of the night, you won’t be protected unless you buy more than the state minimum coverage.
Most carriers offer additional coverages including:
- Collision
- Comprehensive
- Medical payments
While these provide you with added peace of mind and financial protection, they also come with higher premiums.
Deductible
Any time you file a claim against your own coverage, you’ll be responsible for covering a portion of the expense before your carrier will step in. This is called your deductible.
The higher your deductible, the more you’re willing to cover upfront for a claim before your insurance company will need to write a check. In exchange for choosing a higher deductible, you’ll usually get a lower premium (and vice versa). Just be sure that you are prepared to cover that expense out of pocket if an incident does occur.
Family members
Even if you’re the only person who drives your car, you may still find that your premiums are impacted by the other individuals in your home.
If there are other adults or driving-age teens in your family or at your residence, they are considered to “have access” to your vehicle. This can increase your premiums substantially, even if they are never allowed to get behind the wheel of your vehicle.
Bottom Line
Auto insurance coverage is required in nearly all states and provides drivers with financial protection any time they get behind the wheel. This coverage can be costly, though, especially for certain drivers or those with high-risk factors. In some cases, you may be able to reduce your auto insurance costs by adjusting certain coverage factors and knowing just how auto insurance premiums are determined.
