Knowing what those factors are can give you insight into why your rate is what it is and how you can potentially lower your rate.
10 factors that determine how auto insurance rates are calculated
Here are the top factors that insurance companies consider when determining your car insurance premium.
Where you live
Insurance companies are regulated by states, so rates can vary wildly depending on where you live. For example, drivers pay an average of $1,264 in New Jersey and $572 in Idaho, according to the Insurance Information Institute.
The majority of accidents happen close to home. So, if you live in an urban area where population density is high, you’re more likely to get in an accident. Alternatively, if you live in a rural area, your rates will be cheaper because of the lower likelihood of an accident.
What’s more, some states have different requirements for what type of and how much insurance coverage you should have.
Your age and gender
Young males are much more likely to get in an accident than anyone else. In contrast, older men are less likely to get into accidents than older women. As a result, the company will use predetermined tables based on your age and gender to know how to weigh this factor.
The vehicle’s safety rating
The type of vehicle you drive isn’t going to improve or decrease your chances of getting in an accident, but it can determine whether personal injury happens. Cars with good safety ratings are likely to get lower insurance rates. On the other hand, flashy cars that are focused more on performance than safety, are more likely to get high rates.
Age of the car
Older cars aren’t more likely to get in an accident than newer cars. But because the car’s value declines the older it gets, there’s a lower threshold for damage to classify the car as “totaled.” This is especially the case if the car is no longer in production and getting parts to repair it is more expensive.
As a result, collision and comprehensive coverages are pricier on older cars.
Your driving record
One of the biggest predictors of whether you’re going to get into an accident is your driving history. For example, if you’ve been ticketed for speeding or running red lights, you’re much more likely to get in an accident than someone who is violation-free.
You would not be a favorable candidate to insure should you have more than two minor violations”
“You would not be a favorable candidate to insure should you have more than two minor violations,” says Gabe Clement, a producer at Byars Wright, an Alabama-based insurance agency. Clement also points out that just one major violation, such as driving under the influence or reckless driving, can hurt your chances of getting coverage.
Also, if you have made claims for an accident in the past, insurance companies view that as a risk, even if you weren’t at fault for the accident.
Statistics show that good credit usually means fewer losses, and bad credit means more likely to have frequent losses”
Your credit history
While it may not seem like there’s a connection, your credit plays a big role here. “Statistics show that good credit usually means fewer losses, and bad credit means more likely to have frequent losses,” says Clement.
He adds, “An insurer may not be willing to provide coverage for several reasons, including payment issues, for someone with unfavorable credit.”
As a result, insurance companies have developed an insurance-based credit score based on information from your credit reports. This means that they can’t see your actual credit score, just your report. For this factor, building and maintaining and excellent credit profile is your best bet.
Your coverage level
When it comes to how much coverage you get on your car, you have some choices. There are some minimums that you have to maintain. For example, all states require that you have a minimum of liability insurance to cover others in an accident where you’re at fault.
Additionally, if you’re financing the vehicle, the lender will require that you have full coverage, which includes liability, collision, and comprehensive coverages. This is to protect their investment.
Beyond the minimums, though, you can go as high or low as you want. You can increase your deductible to lower your monthly rate, and you can opt out of optional coverages, such as rental car reimbursement and roadside assistance.
How much you drive
One of the questions you’ll get during the application process is an estimate of how much you drive per year. Included in that is your daily commute. The more time you spend on the road, the higher your chances are of getting into an accident.
It can be hard to make that estimate but resist the urge to purposely fudge the numbers. Insurance companies can use third-party vendors to verify how much you’re actually driving and revoke any discounts you’ve received for low mileage.
Every company has its way of underwriting insurance policies. They also have different discounts and promotions to get you to choose them over their competitors.
Insurance companies want as much of your business as possible. So they’re willing to give discounts if you have multiple policies with them. This practice of bundling is a common way to get discounts. For example, consider getting car insurance with the same company that offers your renters or homeowners insurance.
How can you lower your car insurance premium?
For starters, make sure you’re getting all the discounts that you’re eligible for. You can typically do this during the application process, but it might help to call the insurance company before you buy the policy to see if there are any others you missed.
Spending extra time to do your due diligence on this may not sound like it’d be worth it, but if you do it right, it can potentially save you hundreds of dollars a year.
That being said, the single best way to get the lowest car insurance rate is to shop around.
Instead of asking around for recommendations, do a little legwork and compare several car insurance companies to get the best rate for you.
After all, with so many factors that go into your car insurance premium, the cheapest company for someone else may not be the cheapest for you.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.