Looking Under the Hood of Your Car Insurance Rates

What Goes into Your Auto Insurance Costs?

Looking Under the Hood of Your Car Insurance Rates
August 19, 2014

If you open the hood of your car and try to identify the components of your engine, can you? Some people successfully identify many of the parts, but most of us don’t get a passing grade. We merely pop open the hood to add oil and fluids (unless we pay someone else to do that) and then go about our business. We look at the engine as a single working unit — one that probably works better without our meddling

How about your car insurance? Could you identify the components that make up your premium? Do you even know where the hood latch is for that? No problem – we’ll pop open the hood for you and give you a guided tour.

Auto insurance rates, like any other form of insurance, are based on risk. There are two aspects of that risk: how likely you are to file a claim and how much that claim is likely to cost. All of the factors below touch on one of these aspects, and some affect both.

  • Age/Marital Status/Gender – Sorry, young, single males. Statistically, that is three strikes against you with respect to higher risk. Therefore, you are charged higher rates than the rest of us, all other factors being equal.

  • Driving/Claims Record – If you have a history of driving infractions like speeding tickets, reckless behavior, or multiple claims in the past, you can also expect to pay higher rates.

  • Driving Environment – Driving more often, for long distances, or at high-risk times with respect to traffic or activity (such as rush hour or 3 a.m.) all result in higher rates.

  • Type of Car – Certain aspects of the car you drive determine how expensive is it to replace or repair and how likely it is that a claim will be filed. Is your model more prone to theft or to accidents? What kind of safety features does it have, and how well does it fare in crash test ratings?

    In general, larger cars are considered to be safer than smaller cars (unless they are prone to rollovers) and produce lower rates. Older cars are cheaper to replace because of depreciation, and as long as they are not in an unsafe condition, your rates will be lower.

  • Type of Coverage –You can choose the types of coverage you want, from the minimum your state requires to a full coverage package. By choosing a higher deductible on any insurance product, you lower the overall payout from insurance companies and receive a lower rate.

    Specialized coverage programs, such as pay-as-you-go that bases your rate solely on a limited mileage, can lower your rates significantly if they fit your needs.

  • Credit Score – In some states and with some insurers, your credit score can be used to assess risk. Several other states have outlawed the practice.

The statistics on all of these factors are evaluated to determine a premium price that covers your likely costs, along with some margin to cover the overhead costs of the insurance company – the final factor that determines your rates.

Companies with lower overhead will tout their lower rates; companies with higher overhead might acknowledge that difference, but will stress the higher service they provide. Both tend to offer discounts that emphasize lower-risk driving behaviors, such as discounts for seniors who have taken approved driver-safety courses.

While all these factors are used to determine rates, companies give them different weights – and the overhead costs and discount structures also differ by company. So if you don’t like the quote you get, shop around. Poke a little bit under the insurance hood now that you know your way around, and you can likely save money, enhance coverage, or both.

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