How is Car Insurance Calculated?

The amount you pay for car insurance can vary based on a number of different variables. Another driver who has a car exactly like yours could be paying a wildly different amount for car insurance than you do. 

If you’re wondering how car insurance works, it’s helpful to understand these seven variables that affect your car insurance premiums and coverage.

What do you drive?

The car you drive can influence your risk of a crash or an insurance claim. Most insurance companies have vehicle safety ratings based on data from customer claims and industry safety reports. If your car’s make and model has a strong safety rating and isn’t a common target for vehicle theft, you may qualify for a lower car insurance premium. 

Who will be insured?

Car crashes are more common for drivers under age 25, especially males. If you are under age 25 or if you have a young son or daughter who will be insured on your policy, your rates may be higher. If you or another driver on your policy is a student who maintains good grades, however, you may qualify for discounts.

What kind of policy do you want?

Most states have laws mandating that every driver maintains a certain level of car insurance, but you may choose additional coverage. While you’ll pay more for extra coverage, you’ll also have greater protection. 

You also get to choose your deductible, which is the amount you’ll be responsible for paying—before insurance coverage kicks in—if you have an insurance claim. If you choose a higher deductible, you’ll usually have a lower monthly payment but more to pay in the event of a claim. If you choose a lower deductible, your monthly payment will probably be higher but you won’t have to pay as much when you have a claim.

How much do you drive?

The more you’re on the road, the more likely you are to have an accident. If you use your car for business or commute long distances between work and home, you’ll probably have to pay more for insurance than people who drive less often and for shorter distances.

What’s your driving track record? 

If you’ve never had a speeding ticket or a car accident, you’ll probably pay a lower rate for car insurance than someone who has had a lot of tickets or accidents. That’s because insurance companies are less likely to view you as a risky driver and they’re willing to offer you a discount. 

If you have filed several claims (such as three claims in three years), many insurance companies will rate you as a risk and will charge a higher price for covering you. Also, if you have any lapses in coverage, some insurance companies will view that negatively as well. 

Where do you live? 

Where you live can influence the likelihood that you may have an accident, as well as how much it would cost to repair any damages. For instance, traffic patterns, crime rates, and local weather all have an influence on your driving. If you live in an area with a high rate of accident claims, your insurance costs are likely to be higher than in an area with few claims and little crime.

Based on all these factors, each insurance company has its own rating system that determines how to calculate your car insurance. Because each company’s system is different, your rates could be significantly different based on which company you use. And insurance companies change their rating systems from time to time, so the company that gives you the best rate right now may not give you the best rate in six months or a year from now. That’s why it’s important to regularly check rates to make sure you’ve got the best deal available for your car insurance needs.