One of the most frequently asked questions that Investopedia gets from new and used car buyers is, "How much will it cost to insure my new ride?" Unfortunately, there is no simple answer to this question.
- The cost of car insurance premiums varies from state to state and insurance company to insurance company, but three standard factors are always considered: you, your car, and what type of insurance you want to buy.
- Insurers look at your driving record, your age, your gender, and an insurance score, similar to a credit score, to help determine the cost of your car insurance.
- The year, make, and model of your car factor into the cost of repairing it, which, along with where you keep it, figure into the price of your premium.
- There are five primary kinds of coverage—liability, collision, comprehensive, personal injury protection, and uninsured motorist—but liability is the only must-have.
Looking at Average Costs for Guidance
Some consumer advocates point to the averages for guidance. According to the National Association of Insurance Commissioners' 2016/2017 Auto Insurance Database Report published this past January, the average cost in 2017 of a "complete" insurance policy (which provides liability, comprehensive, and collision coverage—more on all of those in a bit) ranged from as low as $765 in Maine to a high of $1,638 in Louisiana. The median cost nationwide was $1,134.
Those figures give you a rough idea of how much you’ll pay for an insurance policy. But they are averages—in fact, averages of averages. That means they are really no better than guesses. Costs vary state to state, county to county, insurance provider to insurance provider. So you must choose a provider wisely.
Only the insurance company you select—whether Allstate, Progressive, USAA, Farmer's, GEICO, or another—can answer the "how much?" question with any accuracy. And each will have its list of factors and formulas for assessing risk and, thus, determining your annual premium.
However, there are a few standard factors that you can expect to be taken into consideration when determining how much you will pay, regardless of the carrier. We have broken them down into three categories: you, your car, and the types of coverage you want to purchase. Here's how each one affects the price equation.
Standard Factor #1: You
There are five different "components," focusing on your risk, that companies look at when they are deciding whether to provide you with insurance for your vehicle.
Your driving record
Michael Barry, senior vice president of the Insurance Information Institute, says insurance companies typically take the past few years of driving history into consideration when determining your rates. "The insurer is looking to access the likelihood that you're going to be filing a claim, and somebody with a significant number of moving violations or more serious instances such as driving under the influence will impact the cost of insurance," he explains. That means if you've got a clean driving record, you're not a risk. If you're one moving violation from having your license revoked, then you are a significant risk—and your premium will be higher.
Statistics show that older, more experienced drivers are safer than younger drivers. Younger, inexperienced drivers get into more crashes than experienced drivers, according to the Insurance Institute for Highway Safety. "Eighteen- to 25-year-olds are more likely to file claims than almost any other age group," says Barry. As a result, they pay more for coverage.
Adults age 60 to 64 have the lowest rate of claims and pay lower insurance premiums than most younger adults. Perhaps, the Insurance Information Institute says, because of the "physical changes associated with age that affect eyesight, hearing, and cognitive ability, senior drivers tend to be more cautious or avoid driving altogether."
Statistically, women drive less than men—although that statistic is changing. As such, they tend to get fewer moving violations, aren't charged as often with driving-under-the-influence (DUIs), and have fewer fatal collisions than men. Thus, men pay higher insurance premiums because they represent a higher risk.
Your credit score
Insurance scores and credit scores differ, but they are related. Both are calculated from the information in a credit report, such as outstanding debt, bankruptcies, length of credit history, collections, new applications for credit, number of credit accounts in use, and timeliness of debt repayment. As such, your credit score is considered a metric of responsibility. Insurance providers use it to assess how you will treat your vehicle and the likelihood that you will file a claim. They call it an "insurance score."
Statistically speaking, people with a low insurance score are more likely to file a claim.
Standard Factor #2: Your Car
Your car's year, make, and model
Insurance carriers don't necessarily weigh the cost of a car but instead how much it costs to repair it. Say a Lamborghini and Kia collide. The Lambo will need expensive, hand-built parts from Italy to make it whole again. Kia replacement parts can be purchased online from almost every aftermarket parts store. Thus, the raging bull owner will pay more for insurance because the sports car costs more to repair.
Where your car 'lives'
Why do insurers look at location? "If you're in a densely populated area, the likelihood of getting into an accident goes up," says Barry, as does your risk assessment. "That's why the rates in states like New York and New Jersey are high." Vandalism and car theft are also higher in densely populated areas.
Areas prone to natural disasters also mean higher risk assessments. "Hurricane season is coming," says Barry. "I immediately think of Florida, Louisiana, Texas. Claims will come in for flooded cars, those hit by fallen tree limbs, incidents that generate an enormous number of auto insurance claims." Hence, the rates in those states will be higher than in areas that have few natural disasters.
Standard Factor #3: The Type of Coverage You Want
The five primary kinds of coverage—liability, collision, comprehensive, personal injury protection, and uninsured motorist—that make up your policy will also help determine your monthly premium's price. So, it’s best to know what these are and how they work.
Each state's "minimum required coverage" is typically the least expensive insurance policy you can buy. Liability is the only must-have. It is mandatory in most states and protects you from the costs incurred if you injure someone or damage their property in a crash.
Collision, or coverage that reimburses the insured for damage sustained to their personal automobile, due to the fault of the insured driver, and comprehensive, which covers damage to your car from causes other than a collision, aren't typically required by law but they are popular options anyway. They are part of what's often referred to as full or complete coverage. They cover you if your car is damaged, whether in a car accident or some other way (think falling trees, and guardrails, for example). Skipping out on comprehensive and collision coverage can lower your monthly premiums, but it can lead to higher costs down the road if you're stuck paying for major repairs.
The others are less popular, but no less important.
- Personal injury protection pays all medical bills for the driver and passengers if you're in an accident.
- Uninsured motorist insurance pays when the other party in a collision doesn't have insurance, or not enough to cover the cost of the resulting medical or repair bills.
The Bottom Line
Insurance companies take into consideration the components of these three standard factors and apply them to their formulas to come up with a price for your automobile insurance. Every insurer is different, which is why it pays to shop around and get quotes from different companies. And don't forget to ask about discounts—if you're over age 55, for instance—which can lower the price of your annual premium.