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Why Am I Paying So Much? How Companies Calculate Your Insurance Premium

Do you want to learn how secretive insurance companies calculate your insurance premiums?

Choosing the right auto insurance can be a bit like choosing the right cellular phone service. Prices are always changing, and the small print is written in similar to English but reads like Swahili.

The only way to pick one is to either educate yourself about the available option. Or throw a dart at a list of the top 10 largest auto insurers and hope you hit something.

We recommend the later. But we’ve written this article for the brave few who wish to take the road less traveled. The few who wish to learn about what goes on behind closed doors in those insurance agencies and how they make decisions.

Specifically, today’s topic is on calculating insurance premiums. So, sit down and buckle up. And when you’re ready to have your mind blown, read on.

Your Age and Your Insurance Premiums

Whether you’re buying car or motorcycle insurance, age is everything. It’s arguably the most significant factor when determining your premiums. The worst part is that it’s totally out of your hands.

Remember, insurance agencies rely on statistics. It’s the best way for them to guarantee they make money. One of the most telling statistics, unfortunately, is a driver’s age.

On average, young drivers have less driving experience and tend to drive more erratically, taking more risks. This leads to more accidents. And that’s what insurance companies zero in on.

Drivers between 17 and 25 face the highest premiums. For the most part, as your age increases, your premium decreases. That’s not guaranteed, but it’s a good rule of thumb.

Your Occupation

If you’re wondering how to reduce insurance premiums, go to college. At least that’s part of the solution. The other half involves the job you land after you finish your education.

Some occupations require you to spend time near high-risk areas, like construction sites. Others keep you on the road. While still others entail transporting heavy equipment or toxic materials.

Guess what. Insurance companies have those statistics too. If you want to lower your premiums, a safe, high paying job that keeps you off the road is your best bet.

Your Vehicle

This one actually needs little explanation. If an auto adjuster evaluates the damage to your car (or determines it a total loss), you get that money. The insurance company is supposed to pay you the amount it will take to fix that damage (or replace your vehicle).

So, more expensive cars mean more costly fixes or replacements. It’s as simple as that. One of the easiest ways to decrease your premiums is simply to buy a cheaper vehicle.

Your Horsepower

If your car is built to go fast, your wallet’s going to suffer. It doesn’t matter whether you actually speed. Remember, it’s all about statistics.

Cars that are built for speed are typically driven at higher speeds. Higher speeds mean an increased likelihood of crashes. Higher numbers of crashes mean pricier insurance.

Reduce your premiums by trading your hotrod in for a minivan.

Your Neighborhood

Every city has crime, but some sections have more than others. Do you live in a neighborhood that’s considered relatively safe? One in which your kids play outside, and you don’t have to lock your doors at night?

Or do you have three locks on your front door and let your kids out only with supervision?

Well, the insurance companies have a system that determines just how safe your block is and charges you accordingly. Some areas are more prone to theft. Others to accidents.

In particular, they calculate your premium based on your postal code. If you want to decrease your premium, consider moving to an area with fewer accidents and crime.

Your Security

We’re not talking about your home security here. We’re talking specifically about your vehicle’s security. Do you have immobilizers, alarms, or some other built-in security features?

If you do, they’ll help deter thieves. Statistically speaking, of course. And that’s all insurance companies care about.

A minor side not on security: where you park your car also matters. If you keep it on your street in a crime-ridden neighborhood, your premiums will go through the roof. If, however, you keep it in a secure garage or car park, your rates will decrease.

Your Use

Commuters pay more than non-commuters. They spend more time in traffic, so they’re more likely to get into an accident than their non-driving counterparts. It makes sense.

But how do insurance companies know whether you commute? How do they know how far you commute? Can they tell whether you eat your breakfast with one hand during your drive and put on your makeup in heavy traffic?

These are all good questions, but useless. They use the magic of statistics to determine how likely it is that you commute and charge you accordingly. One metric they use is your annual driving mileage. The others aren’t quite as clear cut.

Your History

When is the last time you had to make an insurance claim? What about your license? Have you had any points removed from driving or parking violations?

They’re both significant factors that insurance companies use to calculate your premiums. Any claims you made in the last 5 years, even if you weren’t at fault, will raise your prices.

Don’t be afraid to ask for the details of your past claims if you haven’t already. They’ll give you a good idea of what you’re getting into.

The opposite is also true. If you haven’t made any claims, it counts for you. Each year you drive without making a claim, you get a “no-claims bonus.” Most insurers accept up to five years of no-claim bonuses to reduce your rates.

Your Coverage

The less your insurance company has to pay, the lower your premium. If you pick a minimum coverage plan, any accident will cost your insurance company less than if you’d picked a full coverage plan. They make you pay accordingly.

What’s Next?

Now that you know the nitty-gritty behind insurance premiums, get on the phone with your insurance company. Don’t be shy. Ask them how much your rates will drop if you reduce the risk of one of the factors listed above.

A small change might save you thousands on insurance each year. Please take five minutes to read our other articles on all things automotive.

So long and good luck!