Drivers throughout the United States who own a vehicle are almost always required to have a car insurance policy. With the risks you face on the road and the financial considerations involved, the cost of insurance is not weighed lightly. In fact, Americans spend about $1,674 annually on their car insurance. You may wonder, why is the cost of car insurance so high in the first place?
Car insurance premiums are a variable expense accounting for approximately 2.44% of your annual income. However, the calculation behind insurance rates can be explained by several factors. While there are some variables you cannot control — like claim frequency based on geographic location — there are components you hold some influence over, including your vehicle type, insurance history and driving record.
Why your car insurance rates are so high
The average cost of insurance greatly varies by individual person so analyzing your policy next to your friend’s policy will probably not give you an accurate comparison. There are several factors that influence insurance rates that you have little to no control over including the state required coverage limits, your age and your location.
Coverage types and levels
The amount of insurance you have and the type of coverage you purchase greatly influences your rate. Every state decides its own requirements when it comes to the minimum coverage requirements on any auto insurance policy. Some states have very basic minimum requirements for bodily injury and property damage coverage while other states may require additional coverages such as uninsured and/or underinsured motorists and medical payments or personal injury protection (PIP) coverage.
For example, South Carolina requires drivers to carry a minimum of $25,000 bodily injury coverage per person up to $50,000 per accident along with $25,000 in property damage and uninsured motorists’ coverage in the same limits. On the other hand, Maine requires drivers to carry a minimum of $50,000 bodily injury coverage per person up to $100,000 per accident along with $25,000 in property damage and uninsured motorists’ coverage in the same limits. Because the requirements differ by state, a driver is going to start off with different coverages and rates just on a basic liability policy alone.
Further, you may be required to have higher limits or additional coverage if your car has a lien, which would also affect how much you pay annually.
When you are considered a higher-risk driver by insurers, you typically face higher insurance premiums. Age is a huge factor when it comes to determining your risk because statistics show that new teenage drivers are more likely to get into an accident due to lack of experience. Elderly drivers, particularly those over 80, may also be at higher risk of getting into an accident. In fact, an 18-year-old may pay almost 2.5x more per year for their insurance than a 25-year-old.
Insurance premium averages can vary by state or metro specifically due to claim frequency. If you live in a state prone to car accidents, thefts, or weather damage resulting in more claims, the average insurance premium is likely higher. The average annual premium in Mississippi is $1,782, for example — much higher than the average annual premium in Washington at $1,176, which is $498 less than the national average. Comparatively, drivers in San Francisco may receive a lower rate than someone in Los Angeles.
How to lower your car insurance
Since moving to another state may not be a feasible savings option and you cannot do anything about your age, consider the other factors that go into determining your car insurance premium. There are several ways you can lower your car insurance, including improving your credit score, being a good driver and seeking out discounts. Additionally, you can shop around at different insurance companies to see which carrier will offer you the best rate. If you are in the market for a new car, you can also get a quote for a couple different vehicles to see which one might result in the lowest premium.
Improve your credit score
According to the Insurance Information Institute, insured drivers with lower credit scores generally file more claims and are therefore a higher insurance risk. Taking the steps to improve your credit score may simultaneously improve your insurance premium depending on your location, your insurance company, and how drastically your score improves.
Car insurance companies all determine rates differently so just because one company weighs your credit history more heavily does not mean that another company will do the same. In fact, California, Hawaii, and Massachusetts do not even take your credit into consideration. Because each provider calculates premiums differently, it is generally recommended to shop around for the best quote, even if you have lower-than-average or poor credit.
Practice good driving habits
Although it varies by state, driving infractions can add up to $730 in rate increases per year on your policy. Practicing good driving habits and having a clear driving record is probably the most simple and self-explanatory way to improve your insurance premium. If you have gotten several speeding tickets and had an accident or two, you have probably already seen your rate increase or expect a higher premium at your next renewal.
Some states offer defensive driver courses that can limit the number of points against your license and if the course is approved by your insurance company, you may be able to lower your premium. Additionally, some companies offer accident forgiveness plans that would keep your auto insurance from going up in the event of one accident.
Take advantage of discounts
Even though discount availability varies by state and insurance company, auto insurance discounts are the quickest way to automatically lower your premium regardless of your age, location, and driving history. When you are getting a quote, be sure to inquire what discounts may apply to your new or existing policy. There are many types of car insurance discounts including:
- Multi-policy discounts
- Multi-car discounts
- Good driver discounts
- Good student discounts
- Homeowner discounts
- Loyalty discounts
- Accident-free discounts
- New car discounts
- Anti-theft and safety restraint discounts
- Hybrid car discounts
- Employee/military discounts
- Full pay or auto-pay discounts
- Defensive driving discounts
- Online/paperless discounts
- Low usage/mileage discounts
- Senior discounts
Understanding what contributes to the cost of your insurance can help guide your financial decisions, driving behavior and how you approach looking for a provider. Although some aspects are beyond your control, you may find areas to creatively approach lowering your risk as a driver in the eyes of insurers and potentially obtain more affordable policies over time.