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How are car insurance rates determined?

minute read

    Every driver on the road needs to have car insurance by law. Though this is required for all drivers, every person is different and so are their car insurance rates and policies.

    Insurance companies may consider several unique factors to determine how big of a risk you might be — and therefore what to charge you for insurance. Understanding those factors and how insurers evaluate them can potentially help you improve your car insurance rates in the future. Let’s learn more about what factors determine your insurance premium.

    Driving-related factors

    One of the first things insurers look at when evaluating your application for insurance is your car and history as a driver. Here’s a summary of some driving-related factors that may affect car insurance rates:

    Your driving record

    Your history as a driver can tell insurance companies about your habits as a driver and how likely you might be to get into an accident, have traffic violations or anything else that may make you riskier to insure. If you’ve got a consistent history of being a safe driver, it’ll likely improve your chances of getting a more favorable rate.

    Vehicle make and model

    The vehicle itself can be a major factor when calculating your insurance rates. For instance, expensive new cars typically cost more to insure, but some older cars, including classic or collectibles, may also result in higher premiums due to costlier repairs or hard-to find parts. On the other hand, cars with premium safety features may result in lower rates and help you qualify for certain discounts.

    Intended use

    The way you use your car and how often can play a part in your rate calculation as well. More miles driven typically means more chances of having an accident, so people with lengthy daily commutes are likely to pay a higher rate than someone who’s a “weekend” driver only taking occasional jaunts around the neighborhood.

    Personal factors

    After evaluating your car and your driving history, insurance companies will look more closely at your personal details. There are several factors that can affect car insurance rates, including:

    Age, sex and marital status

    Your age may be used by insurance companies to assess the level of risk you present. Older drivers tend to have fewer accidents than younger drivers who have less experience on the road. As a result, younger drivers often pay higher rates.

    Sex and marital status are other factors that may also be considered.


    What does car insurance have in common with real estate? Location, location, location. Drivers in areas with higher crime rates are more likely to pay higher rates than those living in a community with lower crime rates. Even your parking choice (on the street vs. in a private garage) can potentially affect your rate.

    Discount eligibility

    Some people are eligible for discounts based on certain criteria. Active and veteran armed services personnel and their families, for instance, are often eligible for military discounts. There may also be discounts or special rates for college students, educators and more. You might also find certain incentives for insuring multiple cars or bundling your insurance packages. These offers often vary from one insurance company to the next, so it may be helpful to ask if there are any discounts you can take advantage of.

    Financial factors

    Your financial health and history will also factor into the calculation of your car insurance rates. Here are some of the details insurers look at:

    Credit score

    Depending on the state you live in, insurance companies may use your credit information as a factor when calculating your rates. This credit-based insurance score isn’t the same thing as credit scores used by lenders to evaluate creditworthiness, though both of these scores assess a lot of the same information.

    Previous claims history

    If your insurance company has to pay out a claim due to an accident in which you were at fault, you’re likely to see your rates go up at your next policy renewal. Although some insurers now offer accident forgiveness plans, a history of frequent claims may lead to higher rates.

    The amount of coverage purchased

    One of the factors that affects car insurance rates is the actual amount of coverage you’re purchasing. Minimum coverage policies that cost less may only cover injury or damage to others. Full coverage policies usually cost more but typically also cover your own injury or damage costs along with injury or damage to others.

    Potential ways to lower your car insurance rates

    Your rates are based on factors unique to you, and there are some potential strategies you might consider to help save money. These include:

    Shopping around

    Every insurance company has its own way of weighing your information in its calculations. If you’re not satisfied with your current car insurance rates, it might help to shop around and compare different insurers to see if you could get a better rate elsewhere.

    Driving safely

    As you learned, your driving history can play a big role in determining your rates. If you can keep your record clear of accidents, speeding tickets or any other traffic violations, it could help lower your rate over time.

    Paying bills on time

    Paying your bills (insurance and otherwise) in a timely manner can help increase your overall credit score. In turn, this could help raise your insurance score and get you better rates.

    In summary

    Your car insurance rates aren’t just an arbitrary number drawn up by someone behind a desk. As you now see, companies use your own information to determine your rates. This means you may have some control over your rates. By doing things like driving safely, choosing a safer car that’s less expensive to insure and paying bills on time, you may be able to lower or improve your rates over time.

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