What Is a Car Insurance Premium?

Paying your car insurance bill, or premium, to your auto insurer helps maintain your coverage.

Miranda Marquit
Miranda Marquit Insurance Writer
  • Co-hosts the Money Talks News podcast

  • MBA from Utah State University

Miranda is a financial writer and avid podcaster with nearly two decades of experience contributing to major outlets, including Forbes, The Hill, and NPR.

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Katie Powers
Edited byKatie Powers
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Katie PowersAuto and Life Insurance Editor
  • Licensed auto and home insurance agent

  • 3+ years experience in insurance and personal finance editing

Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.

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Updated April 22, 2024

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A car insurance premium is the amount an auto insurance company charges in exchange for protecting you and your car from financial damage in case a covered event — like an accident — occurs. 

Here’s what you need to know about car insurance policy premiums, including what affects your premium and how it relates to your insurance coverage.

What is a car insurance premium?

Your auto insurance premium equals the amount you regularly pay for your coverage. Auto insurers design car insurance to reduce your financial risk in the event of an accident or some other type of damage to your car. You pay the premium to keep the policy in force. If you get in an accident or some other covered damage occurs, the insurance company covers some or all of the cost depending on the type and levels of coverage you’ve purchased.[1]

You can avoid a potentially bigger financial cost later for a smaller amount of money paid regularly, since the auto insurance company will cover your costs. Depending on the car insurance company and your policy, you may pay premiums monthly, semi-annually, or annually. You can usually choose to send in payments or have them automatically deducted from your bank account.

Cheapest recent rates

Drivers using Insurify have found quotes as cheap as $36/mo for liability only and $39/mo for full coverage.

*Quotes generated for Insurify users within the last 10 days. Last updated on April 22, 2024

Rates shown are real-time Insurify user quotes from 100+ insurance companies and Quadrant Information Services data. Insurify’s algorithm excludes anomalous quotes and anonymizes personal details, then displays refined quotes by price, date, and insurer popularity up to 10 days ago from April 22, 2024. Actual quotes may vary based on the policy buyer’s unique driver profile.

*Quotes generated for Insurify users within the last 10 days. Last updated on April 22, 2024

Rates shown are real-time Insurify user quotes from 100+ insurance companies and Quadrant Information Services data. Insurify’s algorithm excludes anomalous quotes and anonymizes personal details, then displays refined quotes by price, date, and insurer popularity up to 10 days ago from April 22, 2024. Actual quotes may vary based on the policy buyer’s unique driver profile.

How is a car insurance premium different from a deductible?

You’ve also likely heard the term “deductible” in relation to insurance. Unlike premium payments, your deductible will only come up if you file a claim. A deductible is the out-of-pocket cost you pay for covered damages before your insurance coverage kicks in. On the other hand, you need to pay your premium on an ongoing basis to maintain coverage. Your premiums don’t count as part of your car insurance deductible.[2]

For example, if you have coverage with a $250 deductible and have an accident that results in $8,000 in covered damages, you’ll pay $250 as your share of the cost. The insurance company pays the remaining $7,750.

Learn More: No-Deductible Car Insurance: Is It Right for You?

How is your premium calculated?

To calculate auto insurance rates, insurers use different factors to determine your risk levels for having an accident and filing claims. If you demonstrate a higher risk, you’ll likely pay a higher premium.[3] Learn more below about some of the rating factors you can expect an insurer to consider when determining premiums:

  • Your age: Of all age groups, teenagers and drivers younger than 25 pose the highest risks of financial loss to auto insurance companies.[4] Most insurers offer a good student discount for drivers in school who get good grades, but younger drivers still generally pay higher rates.

  • Your state: Where you live also makes a difference. The average car insurance premium varies by state, in part based on overall accident and loss statistics. Weather, climate, population density, and minimum insurance requirements may also affect variations by state.

  • Crime rates in your area: You might also see different rates based on your ZIP code. Urban, suburban, and rural areas tend to have different crime and theft statistics. Your auto insurer may consider the likelihood of you having your car stolen, depending on where you live.

  • Safety features of your car: You can often get a discount on your car insurance premium if you add safety features that would reduce your chances of having an accident or facing severe injury. For example, having or installing antilock brakes, airbags, and anti-theft systems can earn you a discount.

  • Vehicle type: A high-performance car that’s more expensive to repair or that you may drive more aggressively can also result in increased rates compared to a low-value or older vehicle. A higher-value car can be more expensive to replace.

  • How you use the car: The primary purpose of the car can also factor into your insurance. If you drive it every day to work, insurers might view you as more likely to get in an accident. Additionally, urban drivers might receive higher rates because they drive in congested city traffic more. How often you drive matters, too, and low-mileage drivers often earn discounts.

  • Number of years you’ve been driving: Experienced drivers tend to pay much less for auto coverage than new drivers because more experience leads to safer driving. Sometimes, gender matters, too, since men engage in risky driving practices, like speeding and forgoing a seat belt, more frequently than women.[5]

  • Your driving record: An auto insurance company will also carefully consider your driving record, including traffic violations, accidents, and other issues. If you have a higher or frequent occurrence of issues, you’ll face higher insurance premiums. Good driving habits can have a significant impact on keeping your rates low, sometimes through a good driver discount.

  • Your credit score: Insurers look at credit information when setting your insurance rate, though some states prohibit this practice. Drivers with poor credit tend to pay higher rates than drivers with good credit.

  • Other drivers using the vehicle: You’ll also have to list any other drivers who plan to use your car. The ages, genders, marital status, and driving records of other drivers can also affect your car insurance rate.

Learn More: Average Car Insurance Rates by Age and Gender

Your premium at a glance

For a deeper understanding of your premium, you should learn how your premium relates to your actual car insurance coverage. In addition to your driving, personal, and vehicle factors, the type of coverage you select will affect your premium as well.

How your premium affects your coverage

Auto insurers offer you different types of coverage to choose from. Each type of coverage you choose will influence your premium.[6] The more coverage you have, the more you’ll pay. Common auto insurance coverages include:

  • Bodily injury liability: Required in nearly every state, this insurance covers injuries you cause to others in an accident.

  • Property damage liability: This coverage pays for damages you cause to someone else’s vehicle or property with your car. Most states require policyholders to have this coverage, according to the Insurance Information Institute.

  • Personal injury protection (PIP): PIP insurance covers your own medical bills following an accident, regardless of fault.

  • Uninsured/underinsured motorist: While all drivers should have insurance, some don’t — and some may even commit a hit-and-run. This coverage can help you take care of costs from damages that a driver with little or no insurance causes.

  • Collision: This coverage pays for damage to your car if you cause an accident or hit something with your vehicle, like another car or a tree.

  • Comprehensive: This coverage provides payment for noncollision incidents, like damages or loss from theft, vandalism, or extreme weather.

A full-coverage policy with liability, collison, and comprehensive coverages will cost more than liability-only coverage. For some older vehicles, it might make sense to purchase only your state’s required liability coverage. If paying for full-coverage insurance to have your car repaired or replaced in an accident would cost more than the value of your car, you should consider trimming your coverage.

Read More: How Much Car Insurance Do I Need?

Setting your coverage limit

You can also influence your premium by how you set your coverage limit. Many states have a minimum coverage amount for liability, but you can choose a higher limit. 

For example, your state might require a minimum of $50,000 of bodily injury liability. If you stick with the minimum, you’ll have a lower premium. Higher coverage amounts, though, lead to higher premiums. Consider what coverage limit seems reasonable, and set your limit there if it works for your budget. Decide how much car insurance you need, and plan accordingly.

Your premium and your deductible

You already know that your premium and your deductible differ, but your deductible also affects your premium. The more you commit to pay out of pocket for an incident, the lower your premium. So, if you choose a higher deductible, you’ll get a lower premium. Having a $750 deductible will lead to lower premium payments than if you had a $250 deductible.

How to save on your insurance premium

You can try to earn a cheaper auto insurance premium in a few different ways, including:

  • Discounts: Many insurers have discount programs. Find out whether you qualify for good student, good driver, or other discounts. Some companies offer discounts for belonging to certain organizations or for being a veteran.

  • Shopping around: Compare different quotes to get an idea of costs with various insurers. You won’t know your actual premium until the insurance company reviews your information and coverage needs, though.

  • Bundling: Use the same company for your car insurance that you use for your home, renters, or life insurance to get a discount. You can also put multiple vehicles on your policy for a discount.

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Car insurance premium FAQs

Although car insurance companies decide premiums, you can still take steps to lower yours. Here’s some more information to help you understand how premiums work and how to find one that’s affordable for you.

  • What is a six-month total premium?

    Many insurers figure out the total premium you’ll pay for an entire term of six months. You can divide that up into more manageable monthly payments, but auto insurers generally determine coverage premiums six or 12 months at a time.

  • What’s the difference between a car insurance premium and a deductible?

    The premium is the amount you regularly pay to keep your car insurance policy in force. The deductible is the amount of money you pay out of pocket when you have a claim and before the insurance kicks in.

  • What is insured declared value (IDV)?

    This describes the amount of money you’ll receive if your vehicle can’t be repaired. Often, the IDV matches the market value of the car.

  • Are your insurance premiums paid yearly or monthly?

    You can usually choose to pay your premium semi-annually or make monthly payments. Some insurers even offer discounts if you make up-front payments.

  • How can you lower your car insurance premium?

    If you drive safely, maintain an accident-free record, and take advantage of discounts, you can usually lower your car insurance premium. You can also get a lower premium by adding safety features to your car, increasing your deductible, and reducing your coverage limits.

Sources

  1. NAIC. "Glossary of Insurance Terms."
  2. Insurance Information Institute. "Understanding your insurance deductibles."
  3. Insurance Information Institute. "What determines the price of an auto insurance policy?."
  4. Centers for Disease Control and Prevention. "Teen Drivers and Passengers: Get the Facts."
  5. Insurance Institute for Highway Safety, Highway Loss Data Institute. "Fatality Facts 2020: Males and females."
  6. Insurance Information Institute. "Auto insurance basics—understanding your coverage."
Miranda Marquit
Miranda Marquit Insurance Writer

Miranda Marquit, MBA, is a freelance financial writer covering various markets and topics since 2006. She has contributed to numerous media outlets, including Forbes, TIME, The Hill, NPR, HuffPost, Yahoo! Money, and more. Her work has been syndicated by MSN Money, Marketwatch, Credit.com, and other publications. She has written about insurance topics for Clearsurance, HealthCare.com, and various other websites. She is also an avid podcaster and co-hosts the Money Talks News podcast. Miranda has a Master’s Degree in Journalism from Syracuse University. Connect with her on LinkedIn.

Katie Powers
Edited byKatie PowersAuto and Life Insurance Editor
Photo of an Insurify author
Katie PowersAuto and Life Insurance Editor
  • Licensed auto and home insurance agent

  • 3+ years experience in insurance and personal finance editing

Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.

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