How to Calculate Car Insurance: Everything to Know

The amount you pay for car insurance can vary greatly depending on the many factors insurers look at. Your premium can even differ based on where you get your car insurance.

According to CNN Business Edition, the national average cost of full-coverage car insurance in the U.S. in 2023 is $2,014 per year, almost 14% higher than in 2022. However, depending on many contributing factors, you may pay less or more than the national average. For example, Florida has a higher insurance rate than Ohio because of a consistently high risk of storms.

Before purchasing a car insurance policy, it can be helpful to understand which factors car insurance companies use to determine their premiums. In this guide, we’ll explain the basics of car insurance and how to calculate insurance costs.

Car Insurance Basics

Car insurance is a contract between you and an insurance company that gives you financial protection against loss and damage to your car. In exchange, you pay a premium to the company as outlined in the car insurance policy.

Auto insurance spreads the financial risk between you and your insurer. When you buy a car insurance policy, you choose a suitable coverage limit based on the financial protection you want. As you increase your coverage limit, your premiums will also increase.

Types of Car Insurance

There are many types of car insurance; some are optional, and some are mandatory, depending on where you live. Understanding insurance types will help you find a suitable policy to protect yourself and your passengers in an accident. Here are the most common types of car insurance:

Liability Insurance

Liability coverage is a mandatory requirement for drivers in most states. It compensates others when you’re at fault for an accident that causes injuries, damage, or death. Auto liability insurance can also cover your legal expenses if another driver sues you for an accident you cause. There are two forms of auto liability insurance: Bodily injury liability pays for the other driver’s medical expenses , while property damage liability coverage pays for their vehicle repairs.

Uninsured/Underinsured Motorist Coverage

Uninsured motorist insurance covers you in an accident with an uninsured driver, while underinsured motorist insurance reimburses you if the at-fault driver’s policy is inadequate to cover your injuries or vehicle damages. UM and UIM usually pay for your medical expenses and those of your passengers in an accident. In some states, the coverage can also pay for vehicle damages, lost wages, and funeral expenses in case of death.

Collision and Comprehensive Coverage

Collision coverage can help repair or replace your vehicle if you hit another vehicle or an object. Conversely, comprehensive insurance pays for non-collision occurrences, including vandalism, hail, storms, floods, earthquakes, or falling objects. Collision and comprehensive coverage are optional in all states, although lenders may require them if you’re financing or leasing a car.

Personal Injury Protection

Personal injury protection covers the injuries you and your passengers sustain in an accident. It also covers lost wages, funeral expenses, survivor benefits, rehabilitation, and replacement costs for accident victims. PIP is also known as no-fault insurance because it covers accident-related expenses regardless of who’s at fault. PIP is part of the no-fault insurance laws and is mandatory in Delaware, Florida, Hawaii, Kansas, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, and Utah. Some other states allow you to purchase optional PIP coverage.

Why Do You Need Car Insurance?

Car insurance covers unforeseen bills and liabilities arising from an accident. It protects you from hefty out-of-pocket expenses, provided you don’t exceed the coverage limit. Without it, you risk paying out-of-pocket to settle legal claims, medical expenses, and damages if you’re at fault. Here are some other reasons you need auto insurance:

Legal Requirements

Most states require basic liability coverage before you can legally register and drive a car. Driving without valid car insurance may lead to fines or even license suspension.

Car Lease or Financing

Banks, credit unions, and other lending institutions will require valid insurance to finance a car purchase. Likewise, car dealers will require you to purchase collision and comprehensive coverage before leasing a vehicle. Car insurance protects the company against financial losses if you file a claim after an accident.

How to Calculate Car Insurance Premiums

Every car insurance policy has a premium you must pay to get continuous financial protection. Most car insurance companies allow you to get a personalized rate quote online before you purchase a policy. However, some strategies can help you estimate your costs if you can’t access a car insurance calculator. Follow the steps below to calculate car insurance costs:

1. Choose the Right Car Model

The first step to understanding insurance costs is determining the car model you want to insure. The make and model of your vehicle will impact the cost of your car insurance. In general, cars with higher value are more expensive to insure. Choosing a used model can help you get a more affordable rate.

2. Determine the Coverage You Need

Most states require drivers to carry a minimum amount of car insurance. A minimum coverage policy is the cheapest option, but it offers little financial protection in an accident.

You can also buy full coverage insurance that includes comprehensive and collision protection. Unlike liability-only coverage, it pays for non-collision damages in different situations. However, it comes with higher premiums than liability-only coverage.

Finally, you can buy optional coverage to address your individual preferences. For example, if you have an old car that may break down suddenly, you may want to add optional roadside assistance to cover your towing needs.

3. Compare Multiple Quotes

Comparing quotes from multiple insurance companies allows you to see which company can give you the best deal for your personal situation and coverage needs. Comparing quotes also helps you understand recent changes in pricing if you haven’t purchased a car policy in some time.

Which Factors Affect Car Insurance Premiums?

Car insurance companies consider many factors when calculating your premiums. Here are some of the biggest factors that can impact your premium:

Vehicle Type

The type of car you drive will determine how much you’ll pay for insurance. Companies will assess the theft and crash statistics of the car model to determine a general insurance rate. If a specific model has high theft and crash rates, you’ll likely pay more to insure the vehicle.

The manufacturer’s suggested retail price (MSRP) is another essential consideration. An expensive car will cost more to insure because the insurance provider will pay more to replace it if it’s stolen or totaled. Similarly, if the car has expensive parts, you’ll pay more for insurance than for a cheaper car.

Finally, a car’s safety record will affect your insurance costs. If the vehicle has adequate safety features, it offers more protection against injuries during an accident. Subsequently, you’ll pay a lower rate because there’s a lower risk of filing a medical claim in a car crash.

Driving Record

Reputable insurance companies will examine your driving record when calculating insurance premiums. Some important factors include traffic violations, speeding tickets, and the frequency of at-fault accidents. For this reason, a DUI offense may double your insurance premiums, while an accident-free record will reduce your rates.

Credit Score

Insurance companies use credit scores to determine your possibility of filing a claim. They will assess outstanding debts and your debt payment history; a poor score will generally lead to higher car insurance rates.

Location

Location is an essential factor in calculating insurance costs. Generally, urban areas have heavy traffic, high population density, and increased crime rates, which result in higher premiums. However, if you live in a rural community, you’ll often drive in less traffic and experience lower crime rates, which could help you get a lower rate.

State Jurisdiction

Different states have regulations and requirements that impact insurance costs. As a result, an insurance policy can have varying prices across different states. Some states only require minimum liability coverage; in others, you must purchase extra coverage like personal injury protection. States such as Florida, Michigan, Delaware, New York, and New Jersey require extra coverage and have high insurance rates.

The frequency of accident lawsuits in your state can also impact insurance costs. Providers usually charge higher premiums to drivers from states with frequent lawsuits. An example is Louisiana, which has a higher rate of lawsuits and insurance claims than the national average and higher rates compared to other states.

The Role of Age and Gender in Car Insurance Costs

Insurance service providers will consider your age when calculating costs. Generally, younger drivers have less experience and are more likely to be involved in collisions than older drivers. As a result, insurers charge more to cover the high risk of settling an accident claim from a young driver. However, middle-aged and senior drivers pay less for car insurance because as you age, you gain more driving experience, practice safer habits, and reduce the risk of filing a claim.

Gender also significantly impacts insurance rates across many states. Women are less likely to cause serious traffic accidents than male drivers. Companies, therefore, charge lower rates to female drivers than their male counterparts.

How to Lower Your Car Insurance Cost

Many factors can raise your car insurance costs. However, you can take proactive measures to manage them. Here are three practical ways to lower car insurance costs:

1. Take a Defensive Driving Course

A speeding ticket or traffic violation can increase your rates, but you can correct the situation if you take a defensive driving course. The course available in many states is designed for first-time traffic offenders to correct their driving habits. The lessons generally focus on understanding traffic laws, acquiring basic car knowledge, and practicing safe driving habits. Upon completion, you can get a ticket dismissal or point reduction on your driving license. Depending on the insurance provider, a defensive driving course may also give you a discount on your premiums.

2. Bundle Your Insurance Policies

An easy way to get more affordable insurance is to bundle multiple policies under the same company. Bundling is convenient because you can pay a single amount instead of making multiple payments for different policies.

Bundling is also cost-effective because companies typically provide multi-policy discounts. According to Forbes, you can save 5% to 25% on your premiums from a multi-policy discount. So, if you’re looking to save on car insurance, let one insurance company handle all your policies.

3. Increase Your Deductibles

Your deductible is the money you pay before an insurer honors your claim. For example, you may hit a tree, and your car requires repairs amounting to $2,000. If you have a $500 deductible, the insurer will pay $1,500 for your claim. A higher deductible gives you more financial responsibility for the claim and will result in a lower rate.

Estimating Car Insurance Costs: FAQs

What Do You Need to Get a Car Insurance Cost Estimate?

To get a car insurance quote, you will need to provide some information about yourself and your vehicle. You may need to provide your age, address, vehicle information (year, make, model, and VIN), past driving record, and education level.

What Are the Cheapest Car Insurance Companies?

The top five cheapest insurance companies are USAA, Westfield, Auto-Owners Insurance, Travelers, and GEICO. USAA stands out with the cheapest annual rates at $1,412, although it’s only available to members of the military, veterans, and their families.

Will Car Insurance Costs Rise in 2023?

Experts predict that car insurance costs will increase in 2023. Some of the contributing factors include inflation, supply chain complexities, and global market trends.

Are You Worried about High Insurance Costs?

Understanding the dynamics of car insurance can be tricky because companies use many pricing factors. However, if you know how companies calculate insurance costs, you can adjust your budget and maximize cost-saving opportunities.

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