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What is a Car Insurance Premium? Everything You Need to Know About it.


    Everywhere you see a car, know it is likely covered by an auto insurance policy. Did you know that over 6 million passenger car accidents in the US occurred in the year 2019 alone? Driving on the roads is not safe at all. If you drive regularly, there must have been an incident where you got in an accident, no matter how small or big. This absolute necessity of auto insurance makes properly knowing about it so important. 

    Car Insurance Premium

    But how does the entire auto insurance method work? Why do companies sell auto insurance and how is it profitable for them? Most importantly, what is a car insurance premium, and how many factors affect the auto insurance premium? This article will describe in detail these topics. Here is everything you need to know about auto insurance premiums and everything related to it. 

    How Auto Insurance Companies Work?

    When you are driving a car, there is a very high chance of getting in an accident. No matter if an accident is small or big, there’s one thing for sure; they are expensive. From a simple fender to a completely totaled car, accidents can make you shell out thousands of dollars.

    This is why people buy auto insurance policies. When you get auto insurance, you are making the insurance company liable to pay for the damages and other costs (depending on the type of policy you get). This is what you are charged for when you buy an auto insurance policy. The insurance company becomes liable for your car accident. 

    Auto insurance companies assess every possible factor regarding the policyholder before selling them a policy. This assessment is done to calculate how likely the person is to get in a road accident and make an insurance claim. Higher the chances of an insurance claim, the higher the rates of the policy for the person. 

    The number of auto insurance claims is always going to be less than people with active insurance policies. This is how auto insurance companies work and can pay out those ridiculous amounts of money in insurance claims. To make sure they always have a source of income, policyholders have to pay insurance premiums. 

    What is a Car Insurance Premium?

    To keep your auto insurance policy (and any other insurance policy) active, policyholders must keep paying some amount of money regularly, either in the form of monthly payments or annual payments. This amount is usually a percentage of the insurance coverage and varies based on multiple factors. 

    Personal car insurance premiums are not tax deductibles but for people with business car insurance, auto insurance premiums can be written off as business expenses. Your insurance premium rates depend on multiple factors, and there are some ways to reduce the cost of premiums. Let’s take a look at those factors.


    Deductibles and auto insurance premiums go hand-in-hand. A deductible is a small amount of money that you pay in an insurance claim before the insurance company pays the remaining amount of the insurance policy. Deductibles are used by the company to prevent insurance fraud and unnecessary insurance claims. If you know you have to pay $1,000 before the insurance company pays the rest, you’d avoid getting in a car accident. 

    Here’s how deductibles and insurance premiums are related. Higher the deductible, lower the car insurance premium rates. This means that if you are willing to pay more from your pocket during an auto insurance claim, then you get to pay less for auto insurance premiums.

    On the other hand, if you plan on reducing your deductibles, you’ll have to pay less from your pocket during an insurance claim, but the rates of insurance premiums will shoot up. Either way, you will end up paying more if you don’t plan it smartly. 

    Here’s how to plan it. If you have good experience in driving and don’t drive rashly, then increase your deductibles. Drive carefully, avoid getting in an accident due to your fault and you’ll get to pay low rates of insurance premiums. 

    But if you are not the “calm and composed” type when it comes to driving, then reduce the deductibles. Granted that you’ll end up paying more on insurance premiums, but if you get in a car accident, you don’t need to burn a hole in your pocket. 

    Insurance Coverage

    The amount of insurance coverage your car insurance policy has (the maximum amount the insurance company will pay in an insurance claim) is also a direct deciding factor in insurance premium rates. Policies with higher coverage limits require higher premium rates. When you are looking for a policy, you’d get the premium rates with the auto insurance quotes

    This again comes down to the risk-management factor. Auto insurance companies have to consider everything to offset the risk of an insurance claim. If you get an auto insurance policy with a coverage limit of $500,000, it is going to require a hefty insurance premium price tag. This is because, in case of an insurance claim, the company might have to pay the entire $500,000.

    Driving Record

    Another direct and obvious factor in deciding car insurance premium rates is your driving record. People with a bad driving record tend to pay higher insurance rates and premium prices. This is obvious as they are more likely to be in a car accident and hence are high-risk individuals.

    Minor traffic violations such as speeding tickets or driving through a red light will slightly bump up your auto insurance premium rates. But if you have serious charges such as a DUI charge, expect to pay hundreds of dollars more in insurance premiums. 

    Credit Score

    It might sound absurd but yes, your credit score affects your car insurance premium rates. People with bad credit scores get higher rates of auto insurance premiums. This is because according to insurance companies, they are more likely to miss out on premium payments. 

    And that was all about auto insurance premiums, the factors that affect the rates, and how you can reduce the cost of insurance premiums. 

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