What Is the Premium for Car Insurance: Everything You Need to Know

Auto insurance ranks among the top of the list of current types of insurance. It provides reliable protection in case of unforeseen events on the road. It is a kind of guarantee, which gives confidence in free movement on your own transport.

The essence of any type of insurance is that the client pays a certain amount of money to the company (one-time or with a given periodicity) and, in exchange, receives financial protection in the event of an insured event. This amount is the insurance premium.

In this article we will tell you more about what is a car insurance premium, what types there are, how the amount of premiums is calculated, and how to save money on car insurance.

What Is an Insurance Premium?

The main document regulating the relations between the policyholder and the insurer is the insurance contract. It comes into force from the moment the policyholder pays a certain premium. Only then does the obligation of the other party to the contract (the insurer) to pay the insurance indemnity arises. Since the policyholder is the first to pay, their contribution is called the premium.

So, what is an auto insurance premium? To give a brief definition, it is the insurance premium that the customer is obliged to pay according to the terms of the contract.

Insurers use premiums to pay claims to policyholders. As a rule, the client pays the premium all at once for the entire insurance period, but sometimes it is paid in installments – once a month, quarter, or year.

Types of Insurance Premiums

After we have looked at what is premium in car insurance, we suggest you find out what types there are.

Insurance premiums are classified according to different features. Let’s consider the most common ones.

Based on Purpose

  • Risk Premium: A specific monetary portion of the insurance contribution providing coverage for a specified risk. Its amount directly depends on the likelihood of the specified insured event occurring in the insurance contract.
  • Net Premium: The contribution required to cover insurance payments for a predefined period for a specific type of insurance.
  • Gross Premium: The insurer’s tariff rate, equal to the sufficient contribution plus surcharges covering expenses related to preventive measures, advertising, coverage of loss-making types of insurance, etc.

Based on the Nature of Insurable Risks

  • Natural Premium: The sum covering the risk for a predefined period, changing with an annual risk change in the long term.
  • Fixed Premiums: Contributions that remain unchanged over time.

Based on the Form of Payment of Required Insurance Contributions

  • One-time Premiums: A single premium paid by the policyholder to the insurer for the entire insurance period in advance.
  • Current Premiums: A portion of the total obligations of the policyholder to the insurer. The amount of current contributions is greater than a one-time payment.
  • Annual Premiums: A one-time payment for contracts with an annual term. This payment is not divided.
  • Installment Premiums: The annual premium divided into parts (for half a year, a quarter, a month).

Based on the Time of Payment

  • Advance Premiums: Payments that the policyholder must make to the insurer before the agreed-upon moment of payment specified in the existing contract.
  • Prepayments: Fully or partially allowed early payment of the required contribution permitted by the insurer.

How Is the Premium in Auto Insurance Calculated?

Knowing what is a premium for car insurance allows you to better understand the basic principles of the insurance system. But it is also important to know how it is calculated.

The amount of premiums will vary for each car owner, as it depends on a number of factors.

  • Driving Record

Drivers with a rich driving experience are less likely to get into an accident, so the cost of the policy for them is lower. And if you are a novice driver, you may be subject to higher coefficients when calculating the cost of the insurance policy. The reason is that you don’t have enough driving practice, which can cause accidents.

  • Driver’s Age

Young drivers tend to have higher insurance premiums. That’s because the risk of car accidents is higher among teens ages 16-19 than any other age group. Adults who are experienced drivers can get discounts on insurance because of their low-risk propensity.

  • Type of Vehicle

The cost of insurance also depends on the car itself, namely its make, model, year of manufacture, engine displacement, and other technical characteristics. For example, if you own a small car with a small engine size, the insurance premium will be lower. This is because such cars have little potential to cause significant damage in the event of an accident.

  • Location

The state where you live has an impact on the calculation of premium car insurance. This is due to both the legal requirements of individual states and the general level of accidents on the roads in different regions. Premiums also depend on population density (they are lower in rural areas compared to large cities), crime rates, and the likelihood of natural disasters.

  • Driving History

Your insurance premium will be higher if you have a record of a traffic violation that led to an accident. Rates increase by an average of 49% if you are at fault for a car accident. Drivers with accident-free histories, on the other hand, can expect lower premiums.

Understanding these factors helps drivers make more informed decisions when choosing an insurance policy.

How to Save Money on Insurance Premiums?

The need to buy insurance for car owners often becomes an additional financial burden, especially if it is comprehensive coverage.

  • According to a Forbes Advisor analysis, the average cost of comprehensive insurance in the U.S. is $2150 per year. Drivers who take out minimum coverage pay an average of $467 per year.

Then the question arises: perhaps you should change insurance companies, and where should you find a cheaper option? We suggest considering ways to help you save money on insurance.

Think about the Policy in Advance

Before you choose a particular make and model of car, think about the need to insure your purchase. Find out what is a premium car insurance and what factors (car price, engine capacity, driving experience, etc.) affect its amount.

Consider whether the choice of a luxury car is justified. Do you need an SUV, or is a city car that is cheaper to insure enough?

Compare Offers

Each insurance company has a different policy, which can affect the cost of premiums. Therefore, it is very important to study several offers and compare them. It will take some time, but if you want to lower the premium on car insurance, you can’t do without monitoring.

Remember that when it comes to insurance, you should not always follow the recommendations of relatives or friends because each case is considered differently by the insurer. Also, you should not automatically renew your insurance with the same company. If you want to save money on your purchase, every time the policy expiration date approaches, compare the current offers.

Increase the Deductible

A deductible is the amount of loss that will not be reimbursed by the insurance company in the event of an accident. You pay this amount out of your own pocket. The higher the deductible, the lower the amount of car premium insurance.

But be careful! Buying a policy with a deductible allows you to save a certain amount of money, but in case of a serious accident, the expenses may exceed these savings. Therefore, it is advisable to increase the deductible if you do not drive much and are confident in your own driving experience.

As you can see, savings in insurance are quite real, even, it would seem, in the absence of obvious reasons to qualify for a discount. Do not forget to check with the managers of the insurance company for information about special promotions and additional bonus offers. This may become a pleasant addition to the already saved amount.

Summarizing

What is a premium on car insurance? This is a sum that the policyholder pays to the insurer in exchange for financial protection of the car in the event of an accident. This payment is made annually but can also be broken down into shorter periods – semi-annually or quarterly.

The insurance premium is calculated by the insurance company based on various factors such as:

  • Driver’s experience and age;
  • Technical characteristics of the vehicle;
  • Place of residence;
  • Driving history, etc.

By comparing quotes from several insurers, increasing the deductible, and exploring discounts, you can save significantly on your policy.

FAQ

What is premium car insurance?

This is the insurance premium that the policyholder is obliged to pay to the insurer in accordance with the insurance contract.

What happens if you don’t pay your premium?

What is premium on car insurance? This is a mandatory fee. The insurance company can cancel your coverage if you do not pay on time.

Can the insurance premium change during the term of the contract?

Yes, it can. Different factors affect the change. For example, you have been in an accident or violated traffic laws. This may result in a higher premium when you renew your policy.

Victoria Berezhetska

Victoria Berezhetska is a Content Lead at Phonexa.com and an expert contributor to American REIA. She has a Bachelor of Science degree in Business Administration, with extensive working experience as a PR specialist and content writer. At American REIA, she helps customers find the right educational material through easily digestible blog posts and buying guides backing their insurance coverage choice. Victoria covers diverse topics around digital and insurance marketing, including auto, home, health, and life insurance.

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