Understanding Auto Insurance – Factors that Affect Premiums

Automobile insurance is meant to protect you against catastrophic losses, such as a major accident or the theft of a new car. But you should not overpay for more than you need. However, you should not expose yourself to large financial risks. While it’s common to carry liability coverage up to $300,000 per accident, that’s probably not enough protection for anyone who owns a home or has substantial savings. Always consider adding a supplementary liability policy, commonly called “umbrella coverage.”

Factors that Affect Premiums

Auto insurance is regulated at the state level, and its cost reflects regional factors as well as individual driver characteristics. Insurance companies base their rates on a host of factors, including how long you’ve been driving. More experienced drivers are less likely to have accidents and are charged lower rates.

Things to keep in mind:

  • Your Age. The fact that you are the safest driver in the world will not necessarily change your premiums if you are in an age group that tends to have more accidents with a car. Insurance companies set demographic groups.
  • Your Car. Your car can greatly affect your premiums. If your car is listed as a high-risk for thieves, then your premium will likely be affected. And depending on the type of vehicle you drive (e.g., a minivan vs. a pricey two-seat roadster), it will also be a factor. For rating purposes, demographic profiles are developed about the types of drivers (prone to traffic violations or accidents, age, etc.) who own a particular type of vehicle. And of course, your vehicle’s brand and model overall safety record is compared to other vehicles. Cars considered more “at risk” will cost more to insure.
  • Your Credit Record. According to some insurance companies, people who generally have bad credit, also present the most claims. By maintaining good credit, you will not fall into automatically into an assumption that doesn’t apply to you. The other reason your credit may be checked is simple. If you have a history of nonpayment of bills, auto insurance companies have less incentive to offer (if at all) a competitive premium rate for you.
  • Your Driving Record. Obviously, if you have frequent traffic violations or accidents, your premiums will increase. Generally, you have to maintain a “clean” driving record for a minimum of six months before you will be eligible for decreases to your premium.
  • Commuting. Many urban areas, especially those that offer easy and safe access to public transportation systems, can essentially charge you for the privilege of driving to work. If you use your car for work-related purposes at least 50 percent of the time, this could be significant, pursuant on where you live.
  • Where You Live. Premiums rise dramatically as you move from the rural outskirts of major cities to an urban residential neighborhood. Factors that must be considered when having a car in a city include the chance of theft, where you park (off-street, preferably garaged, parking), the overall safety of your neighborhood, etc.

Regardless, research and close comparison-shopping will work to your advantage. Some other coverage guidelines to consider include the lists of ‘must haves’, the ‘probably should haves’, and the ‘probably don’t needs’.

The ‘You Must Haves’:

Bodily injury liability helps protect your assets against potential lawsuits. It pays the medical, rehabilitation, and funeral bills of your passengers, the other driver, his passengers, and any pedestrians hurt if you are the cause of the accident. It also covers pain and suffering awards as well as legal costs.

You should get at least $100,000 per person and $300,000 per accident. When you have sizable assets, such as a stock portfolio or an expensive home, you should then consider increasing your limits to $250,000 per person and up to $500,000 per accident. What bodily injury coverage you need is a direct function of what you need to protect financially. However, the cost to raise payouts on this type of coverage can vary dramatically by region. Check rates closely.

Even if your assets are not that large, always keep in mind that so long as your income and assets increase, so does your liability. Property damage pays to repair or replace another person’s vehicle or other property damaged by your car.

Most states require only $10,000 to $25,000, but what if you hit a Lamborghini? If you can afford it, buy coverage of $100,000 and get an umbrella liability policy. Uninsured- and underinsured-motorist coverage covers medical bills, rehabilitation, and funeral costs, as well as losses for pain and suffering incurred by you or passengers in your car, when an accident is caused by a hit-and-run driver or someone who has little or no insurance. Not being adequately covered in the event of such a loss can be devastating to you – not just physically and emotionally, but also financially.

You should carry at least $100,000 per person and $300,000 per accident. However, if you carry higher coverage for bodily injury liability, you should increase this coverage to a similar level.

The ‘You Probably Should Haves’:

Collision and comprehensive coverage pays to repair or replace your car regardless of who caused the accident. Comprehensive pays to repair or replace your car after it’s been stolen or damaged as the result of a storm or other natural disaster, vandalism or theft.

Coverage begins when the cost of repair or replacement is over and above your deductible. Choose the highest deductible you can afford. Ideally, a deductible no less than $500 would be a good start. You should cancel coverage once its cost equals 10 percent of the blue-book value of your car. You cannot collect more than its blue-book value on the used-car market; these values drop steeply as the car ages.

Personal-injury protection (PIP) reimburses you for lost wages and for in-home care. You should carry only the state-required minimum. Your health and disability policies (read below for more information) should cover your needs.

Medical-payments coverage, also known as “med-pay”, covers medical bills for you and your passengers, regardless of who is at fault. If you have good health insurance, you may not need any. However, you may want to carry at least $5,000 to protect your passengers who may not have health coverage. The extra cost for that should be minimal

The ‘Probably Don’t Needs’:

Roadside assistance pays to have your vehicle removed from the scene of an accident. If you already have an auto-club membership or your car’s manufacturer provides this service for free, it’s probably more coverage than you need. Check the specifics of your auto club membership and your car’s manufacturer before deciding against it.

Rental reimbursement pays for a rental if your car has been stolen or is in the shop for repairs after an accident. There’s usually a dollar limit on the amount you’ll be reimbursed per day and per occurrence.

If you have easy access to an extra auto, you likely don’t need this. However, if losing the loss of your car for any extended period of time essentially will leave you stranded, pay the extra money for this coverage. It generally doesn’t cost very much per year anyway.

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