Demystifying the Calculation of Car Insurance Rates

You just purchased a new car, and now you’re in the market for budget car insurance. Once you give an insurance company with some basic information, including the car model, your age, your address, etc., they supply you a monthly premium quote. But how exactly do they calculate that number?

Continue reading to understand how insurers determine your rate and how you can save premium dollars by shopping your coverage.

Different insurance companies, different premiums

Many drivers wrongly think that premium rates are established by the state. While auto insurers must meet certain laws when calculating rates, the rates themselves are not set by law.

When you ask for a quote, the insurance company considers many different factors as they figure out your rate. However, because each insurance company uses their own unique calculation method, you may receive widely varying rates from different insurance providers.

Crunching the numbers

Depending on the laws in your state, insurance companies typically determine your rate based on some or all of the following factors:

* The year, model, body type, engine size and safety features of your vehicle * Your age, gender and marital status * Your personal credit history * Your driving record * Expected usage of the car (such as if you are using the car for commuting to and from work, pleasure or as a collectible.) * Home ownership status and occupation * Number of drivers that will be using the car and their ages * Number of vehicles you own * Requested coverage limits * Where you reside * Assumed weekly, monthly or annual mileage

Normally, your agent will key each of these items into a computer. The software automatically places you into a rate group based on your answers. The insurer then subtracts any discounts for which you are eligible and you’re left with the resulting quote.

Where does my premium go?

Once you find a fair quote and decide to purchase a policy with the auto insurer, you’ll start paying a monthly insurance premium. But what exactly does your monthly premium cover? Let’s examine a typical breakdown:

* Almost 70% of your premium goes towards losses and loss expenses * About 26 percent of your premium goes toward marketing, commissions and other administrative costs * About 4 percent of your premium contributes to the insurance company’s profits

Be sure to shop around

Each insurer has unique sets of claim payments and expenses, and they set rates for each “price group” accordingly. That’s why you’ll likely receive varying quotes from each insurance company. This underscores why it’s so important to take the time to shop around and find the best rate.

Plus, while insurers are prohibited by law to calculate rates based on race or religion, they can consider your age, gender and marital status. However, each company places emphasis on different factors. For example, while one company may place more emphasis on a driver’s gender, another company may view their driving record are more important.

This is yet another reason to request numerous quotes before you settle on a particular company. Besides the rate, you should also consider which company offers the type of coverage you need. Do your homework and locate the best fit for your unique auto insurance needs.

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