Learn How Car Insurance Rates Work – and How to Save Money

By John Malloy Posted : 08/24/2009

Summary

Four major factors broadly determine your rate:

  1. Who you are
  2. What you've done
  3. What you drive
  4. The coverage you want

People often ask us how car insurance companies determine what rates to charge. (Well, no they don't. But we think it's important to clear up any confusion.) Many factors determine what premium rate you see when you ask for quotes. A common misconception is that rates are set by law and can't be changed. Although the methods each auto insurance company uses when setting rates are regulated by state laws, the rates themselves are not set by the state. This fact means that there will be different rates for each company. Once you understand more, you'll see why comparing rates from different companies can save you money.

How is my car insurance rate set?

Let's look at what happens when you submit an application for car insurance. First, you are sorted into an individualized group based on each piece of information in your application, as well as other sources. Once your customized group has been determined, the insurance company calls up the pricing information for that group. Finally, any discounts you qualify for are subtracted from the price, and your quote is returned. The entire process is completed by sophisticated software behind the scenes, based on information you enter online or an agent types into a computer.

Where Does My Premium Go?

Chart

Get free custom rate quotes online, now.

Why do insurance companies have such different rates?

Because each company has many different small groups and different prices for those groups, rates can vary considerably from one car insurance company to the next. Each company has its own set of claim payments and expenses, and they must set rates based on that information.

What can affect the auto insurance rate quotes you receive?

Depending on state laws, which often restrict the type of information an insurance company may use, these factors will usually affect your rates:

Who You Are What You've Done
Age Had accidents
Gender Gotten traffic tickets
Marital status "B" average in school (for students)
Zip code Taken a Defensive Driver course
# of years licensed Let your policy lapse
Credit history Filed bankruptcy
Home ownership Filed lots of claims
Occupation  
What You Drive How Much Coverage You Want
Year Bodily Injury and Property Damage
Make Medical Payments
Model UM/UIM
Hybrid? Comprehensive and Collision
Annual mileage Rental reimbursement
Price Roadside assistance
Safety features  

Here's the breakdown by percentage of premium for coverages on a sample car insurance policy for a sample driver:

Coverages by Percent of Premium

Where Does My Premium Go?

Ever wonder how your premium payment is divvied up? Here's a ballpark sample based on an average Joe with an average policy.

Chart

Are auto insurance rates discriminatory?

Some things are always prohibited from consideration by law, such as race and religion, and others are sometimes not permitted, such as credit history, ZIP code, and the first speeding ticket. However, other factors that may seem unfair, such as age, gender and marital status are often considered. Since each company places a different weight on each factor, it's important to shop around to find the best company for your situation.

Let's see how much you've absorbed about car insurance rates and how the premiums are used. All of the answers can be found in this article, but it's more fun if you don't look! If you want to find out more about certain questions, you can click their links to read an article that explains the answer.

1. Your car insurance rate could be higher if you:

Are male.
Live in the city instead of the country.
Are single.
All of the above.
No Answer

2. Your rates will always increase if you get a speeding ticket.

True
False
No Answer

3. The color of your car is used to determine your rate.

True
False
No Answer

4. All companies offer the same auto insurance discounts.

True
False
No Answer

5. Which statement is true?

Rates are similar for each company because they are set by law.
Rates are similar for each company because they evaluate applications the same way.
Rates are similar for each company because most of the money is profit.
Rates can vary a lot because each company has different experiences with claims and expenses.
No Answer

6. Uninsured/underinsured motorist coverage is expensive and unnecessary.

True
False
No Answer

7. Car insurance companies often use race and religion when setting rates.

True
False
No Answer

8. Car insurance companies often use credit history when setting rates.

True
False
No Answer

9. Most of your auto insurance rate is the legally-required liability portion.

True
False
No Answer

10. Car insurance premiums are mostly used to give the insurance company a profit and pay for their miscellaneous expenses.

True
False
No Answer

Please scroll down for the answers.
















Answers:

  1. All of the above.
  2. False
  3. False
  4. False
  5. Rates can vary a lot because each company has different experiences with claims and expenses.
  6. False
  7. False
  8. True
  9. True
  10. False

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