How Your Car Insurance Coverage Works and Which Factors Impact Costs [2022]

Learning about how your rates are calculated could help you find ways to save.
Last updated Aug. 16, 2021 | By Ben Luthi
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If you drive a car, even only occasionally, having car insurance is essential. But the cost of coverage can be expensive. According to the AAA, the average cost of car insurance is $1,202 per year.

A lot goes into determining that figure, and your actual premiums are typically based on a number of factors. The more you understand about your car insurance costs, the easier it will be to find the best coverage for your needs and budget. Here's a look at your car insurance costs explained.

In this article

Types of car insurance and what they cover

There are several different types of insurance coverage for your vehicle, and while some insurers offer specialized coverages, here are the standard ones to know.

Collision coverage

As the name suggests, collision coverage is designed to cover the cost of repairs or replacement of your vehicle if you hit another vehicle or object, or vice versa.

The amount of coverage you'll get depends on the value of your vehicle, so if the vehicle is newer or generally more expensive to repair or replace, you can typically expect collision coverage to be more expensive.

Comprehensive coverage

Similar to collision coverage, comprehensive coverage covers the cost of repair or replacement of your vehicle in certain situations.

More specifically, you might tap your comprehensive coverage if your vehicle is damaged by fire, wind, hail, theft, vandalism or falling objects. It may also cover you if you hit an animal with your car. The amount of your comprehensive coverage is generally based on the value of your vehicle.

Liability coverage

There are two types of liability insurance coverage: property damage and bodily injury. In both cases, this coverage kicks in if you're at fault and pays the costs of the property damage or physical injuries incurred as a result of the accident. As long as you meet the minimums required by your state, you can usually choose your coverage limits.

Keep in mind, though, that if you skimp on liability coverage and end up in a situation where you caused an accident and your insurance doesn't cover all the costs, you may be sued for the remaining expenses.

Uninsured motorist coverage

If you get in an accident where the other driver is at fault, and they're either uninsured or underinsured, this coverage will help pay for your expenses related to injuries and property damage.

In some states, uninsured motorist coverage may be required, but even if it's not mandatory where you live, it's still a good idea to have it.

Medical coverages

Depending on where you live, you may need to also have medical payments coverage or personal injury protection (PIP). With the former, you'll get help paying medical expenses incurred by you or your passengers due to an injury sustained in a car accident.

PIP, on the other hand, may offer coverage for medical bills plus other expenses related to the accident, regardless of who caused it.

Gap insurance

If you get in an accident that totals your car, either your or the other driver's insurance policy should cover the cost of replacing it. However, if you owe more than the car is worth, you'll need to pay the discrepancy to the lender.

That is, unless you have gap insurance. Depending on the situation, this coverage might pay the difference for you, so you don't have to worry about paying out of pocket.

Optional vs. required coverage

Among the standard coverage options, some are required and some are optional. The distinction between the two depends on where you live.

For example, liability coverage is required in most states, and you typically have to meet a minimum set by state law. Uninsured motorist coverage, medical payments, and PIP may also be required by your state.

Collision and comprehensive coverage aren't required by law in any state because they're designed to protect you, not other people. However, if you borrowed money to purchase your vehicle, the lender may require these coverages to protect its investment.

Gap insurance is always optional and may provide the most value if you're buying a brand-new vehicle that will depreciate quickly or you didn't put any money down on the transaction.

Depending on the insurance company, there may be other optional coverages you can add to your car insurance policy. For example, you could opt to pay for rental car reimbursement, which might pay for some or all of your rental car costs while your vehicle is getting repaired or replaced due to a covered event.

Or you may be able to get emergency roadside assistance, which could help pay for a tow truck, a jumpstart for your dead battery, a locksmith, and more. If you're shopping around for auto insurance, keep these optional coverages in mind.

Car insurance costs explained

Your car insurance premiums depend on several different factors, some of which you can control and some of which you can't. Here's a breakdown of each:

Type of car

Certain types of vehicles cost more to insure, because they're more expensive, less reliable, or don't have built-in safety features or anti-theft devices.

If you already own a car and don't have plans to sell it, you can't do much to control this factor. But if you're looking for a new car, keep insurance costs in mind as you determine how much you can afford.

Driving record

When you apply for car insurance, the insurer will check your driving history to get an idea of your past driving habits. If you've received multiple speeding tickets or you've been in several accidents, you may be considered a riskier driver, which could potentially increase your rate.

The same goes for if you're a new driver and don't have a driving record that the insurer can use to judge how likely you are to file a claim. Insurance companies also typically look at how much you drive since spending more time behind the wheel increases your risk of getting in an accident.

Geographic location

Car insurance premiums are generally more expensive in urban areas, where the likelihood of an accident, theft, or vandalism is higher than in rural and suburban areas.

While you can technically control this, it probably doesn't make much sense to uproot your life and move outside the city for the sake of saving a few bucks on car insurance.

Demographic factors

Men are statistically more likely to get in accidents than women, so they tend to pay higher premiums. Also, age can be a factor because young drivers are less experienced and thus more likely to file a claim.

While these factors are outside of your control, certain insurers may offer discounts to offset higher premiums. For instance, many offer a good student discount if you’re able to maintain a certain GPA while in college.

Deductible amount

With collision and comprehensive coverage, you can't change how much coverage you have because it's based on the value of your vehicle.

But you can potentially adjust the deductible, which is the amount of money that you pay out of pocket before your insurance covers the rest. Opting for a higher deductible can potentially result in lower premiums.

Types of car insurance coverage

There are several different car insurance types, some of which are required and some not. The more auto insurance coverage you choose to buy, the more expensive your policy will be.

Also, some types of coverage allow you to choose how much protection you want. For example, if you want a high liability coverage limit, it will be more expensive than if you just go for the minimum.

But again, the less coverage you have, the likelier it is that you'll have to pay money out of pocket, which could potentially cripple you financially.

Credit score

In most states, auto insurance companies use a credit-based insurance score to help determine your rate. This is because studies have shown that drivers with bad credit are more likely to file claims than drivers with good credit scores.

Some states have banned the practice, though, and even in states where it's legal, insurers typically can't use your credit history as the only reason to hike your premiums.

How to lower your car insurance costs

With so many different costs associated with car insurance, it's critical that you understand the different ways to save on your policy. Here are the top strategies you can use:

  • Shop around: Each insurance provider has its own way of calculating car insurance rates, so it's possible to get a much lower rate from one than the others in your area. Consider getting car insurance quotes from at least three to five insurers to determine which can give you the best rate. FinanceBuzz can help you quickly compare quotes.

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  • Opt for a higher deductible: If you have collision and comprehensive coverage, choosing a higher deductible could cut your monthly or annual premium. Just make sure you can afford the deductible amount in the event that you have to file a claim.
  • Cut coverage: Review your coverages and determine whether you need certain optional protections. But again, make sure you find a balance between your budget and your ability to pay if you get in an accident.
  • Consider bundling: Insurance companies often offer a discount if you have more than one type of insurance product with them. For example, you could get auto and motorcycle insurance, auto and homeowners or renters insurance, or auto and life insurance.
  • Ask for other discounts: Car insurance companies often offer a long list of other discounts that can help cut the cost of your coverage. For instance, some may offer a safe driving discount or a lower rate if you don't drive often. Review the discount options and make sure you're getting credit for each one that you qualify for.
  • Improve your credit: Having good credit could potentially help you avoid higher insurance premiums, and it may also give you access to affordable financing when you need it.

FAQs

Car insurance can be tricky to understand, so it's natural if you still have questions. Here are some of the more common questions we've come across on the topic:

What factors impact your car insurance costs?

There are a lot of different elements that go into your monthly auto insurance premium. Examples include your vehicle, your driving habits, where you live, demographics, types and amounts of coverage, and your credit score.

Understanding these factors will give you a better idea of how to qualify for lower rates on your auto insurance policy.

What's the average cost of car insurance?

AAA has determined that the average annual cost of car insurance in the U.S. is $1,202, which comes out to roughly $100 per month. Of course, you may pay more or less than that, depending on factors like the type of car you drive, your location, and your driving record.

Does your credit score impact car insurance cost?

If you live in a state that allows lenders to use credit in insurance decisions, your credit history matters.

Insurers typically don't use your traditional FICO score, though. Instead, they use insurance credit scores that are tailored more toward the information that helps insurance companies determine how likely you are to file a claim.

The bottom line

Car insurance can offer valuable protection, but that doesn't mean you have to break your budget to pay for it. Understanding all of the costs that go into auto insurance rates might go a long way in helping you save money on car insurance.

While you do have some influence over how much you pay for auto insurance, there are some things that are outside your control. Take some time to research the best car insurance companies and look for opportunities to get the coverage you need at a price that fits your budget.

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Author Details

Ben Luthi Ben is a personal finance and travel writer who loves helping people achieve their money goals. Along with FinanceBuzz, his writing has also been featured on U.S. News, NerdWallet, Experian, Credit Karma, and more.