What is a Premium in Car Insurance and Why Do You Pay It?

You have no choice but to pay a premium for car insurance coverage, but what is it and what does it cover?

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Updated May 13, 2024
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When you get auto insurance, the amount you pay for your policy is called the premium. The premium is essentially the fee you pay to have car insurance coverage. The insurance company charges the premium in exchange for taking on the risk of protecting you and your vehicle in case of a car accident or other incident. Car insurance premiums can be charged monthly, every six months, or annually.

The cost of your premium for car insurance coverage will vary depending on several factors, such as where you live, what kind of car you drive, your age, your driving record, and your credit history. The type and level of coverage you buy also impacts the cost of your auto insurance premium.

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Is an insurance quote the same as a premium?

No, your car insurance quote isn’t officially the same as your premium — but it will usually list the same amount. The quote is just an estimate of how much your premium may be based on the type and level of coverage you want, whereas the premium is the final cost you pay when you purchase your insurance policy.

Before you know for sure what your insurance premium is, you need to shop around to find the best car insurance and get insurance quotes from potential companies. During the quote process, the car insurance company will also look at things such as your age, credit history, driving history, and state where you live to estimate your premium amount.

If you decide to accept the quoted price and buy coverage through a particular company, then you’ll pay your actual premium when you make things official. But it will typically be for the same amount you were quoted.

Is an insurance premium the same as a deductible?

Your insurance premium is different from your deductible.

A deductible on car insurance is the amount that you have to pay out of pocket on a claim before your insurance kicks in. For example, suppose you have liability coverage or collision coverage with a $500 deductible. In that case, if you get into an accident or run into a tree, you’ll first have to pay $500 out of pocket for the damages. Your insurance will pay for the remaining costs (or a percentage of them) up to your full coverage amount.

Even though they’re not the same thing, your premium is impacted by the deductible you choose. If you choose a higher deductible, the cost of your premium will be lower. If you choose a lower deductible, your premium will be higher.

How often do you have to pay an insurance premium?

Car insurance premiums can be paid monthly, every six months, or annually depending on how your insurance company sets up your policy. You can usually save money on your premium if you opt to pay a six-month or annual premium rather than monthly, but some insurance providers make all payment time frames cost roughly the same.

What causes insurance premiums to go up?

Several factors contribute to your insurance premium increasing or decreasing. Here are some of the things that can cause your premium to increase:

Bad driving record

Your driving record has a significant impact on the cost of your car insurance premium. If you have multiple speeding tickets, traffic violations, or any accidents, you’ll have to pay a higher premium than if you had a clean driving record. Even accidents that weren’t your fault can increase your premiums.

Poor credit history

Car insurance companies look at your credit history when determining your premium. Insurers see how you handle your finances as an indicator of your risk level to the company. If your credit score drops, the insurance company considers you a higher risk, and you will likely see an increase in your premium. That is, if basing premium costs on credit scores is allowed in your state.

States with restrictions on insurers’ use of credit history:

  • California
  • Hawaii
  • Maryland
  • Massachusetts

Type of car

Because your car insurance pays to repair or replace your vehicle if it gets damaged, the vehicle’s age and value impact your premium. If you trade in your old car for a brand new one, you can expect your premium to increase. Your premium may also increase if you get a sports car or similarly fast and luxurious vehicle.

Accident forgiveness
Several car insurance companies offer accident forgiveness, which enables policyholders with good driving records to avoid an increase in their premiums if they have an accident for the first time in three or five years.

4 ways to get lower premiums

If your premium’s a bit pricey, there are several ways you can lower the cost. Here are three of them:

1. Discounts

Most companies offer a number of car insurance discounts that could help you save money. Discounts vary depending on your insurer, but common ones offered by many car insurance companies include good student discounts, good driver discounts, multi-car discounts, and defensive driving course discounts.

2. Bundling

When you own or rent your home, you need homeowner’s or renters insurance to help protect your assets. By bundling your car insurance policy with a homeowner’s or renter’s insurance policy, you may be able to save money on your car insurance premiums.

3. Improved credit score

It doesn’t always make sense, but to a car insurance company, a bad credit history means you could be a high-risk driver who’s more likely to file an insurance claim, so it charges you a higher premium.

A handful of states don’t allow companies to consider drivers’ credit histories when determining car insurance rates, but most states do. You can decrease the cost of your car insurance premium by improving your credit score and thus reducing your supposed risk level.

4. Lower coverage amounts

Almost all states require a minimum amount of car insurance, such as a certain amount of bodily injury and property damage liability coverage. But the more types of insurance you add to your policy, the higher your auto insurance rates will be.

FAQ about car insurance premiums

What does a six-month total premium mean?

A six-month total premium is the full amount you would pay for all six months of car insurance coverage. Paying the total six-month premium rate upfront, rather than in monthly payments, can save you money in the long run.

Insurance companies usually write car insurance coverage as six-month or 12-month policies. That means your premium rate is locked in for the length of the auto insurance policy. At the end of a six-month policy, the insurance company recalculates your premium and may increase it on renewal. depending on factors such as accidents.

Is a premium how much you pay?

Yes, a premium as it relates to insurance is the amount you pay for the insurance company to give you a policy. The insurance premium doesn’t cover the costs of damage or injuries from an accident — that comes down to what types of coverage and what coverage limits you choose. An insurance premium is more of a guarantee that you have coverage for the length of the policy through the insurance company you paid.

How is my insurance premium calculated?

To calculate your car insurance premium, an insurer looks at factors such as these:

  • Age
  • Location
  • Driving record
  • Credit history
  • Vehicle
  • Requested coverage amounts
  • Deductible

People with bad driving records and younger drivers often face higher premiums. Things like bundling your policy with other insurance types and driving an affordable vehicle can decrease your premiums.

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Bottom line

When you get car insurance, the insurance company charges you a premium, which confirms an agreement that the company will cover you and your vehicle if you are involved in an accident.

Insurance premiums can be paid monthly or in total for a policy term of either six months or a year. To prevent your premium from increasing when it's time to renew, keep your driving record clean, raise your credit score, and drive the same vehicle from one policy renewal to the next.

  • You could save up to $500 with some companies
  • Compare dozens of providers in under 5 minutes
  • Fast, free and easy way to shop for insurance
  • Quickly find the perfect rate for you

Author Details

Danielle Letenyei

Danielle Letenyei is a professional writer living in Madison, Wisconsin. Her interests include budgeting, travel, credit cards, insurance, and creative side gigs. She hopes her work on these topics can help others navigate the intricate landscape of personal finance.