Determining the cost of auto insurance premiums is a complicated process. Your insurer uses statistical information about you and your car (called rating factors) to do so.
Rating factors are calculated using a broad statistical base of expense and loss information. The statistical base measures your personal rating factors such as your driving record, marital status, where you live, and your age, as well as the rating factors associated with your automobile, such as make and model, installation of safety features, and history of theft. Some factors are more important than others. To take into account the differences in automobile risks, insurers divide the rating factors into two categories: primary and secondary.
How Insurers Price Premiums
Each type of auto insurance has a published base rate that is charged for a certain amount of coverage. For example, in your state $50,000 in property damage coverage may have a base rate of $250. If you have a good driving record, you may be able to purchase this coverage at the base rate. If you have a poor driving record (or other negative rating factor), the insurer will charge you more than the base rate for that type of coverage. The amount of the premium is computed by multiplying the base rate by the applicable rating factor. The lower the rating factor, the better. Separate premiums are calculated for each coverage you select.
Example: You purchase an insurance policy that covers your liability up to $50,000. The base rate for $50,000 liability is $250. Because you have received three speeding tickets, the insurer designates your personal rating for liability at 2.0. Your liability premium is ($250 x 2.0) $500. If you had a perfect driving record and your rating was 1.0, your premium would be only ($250 x 1.0) $250.
Rating the Driver
If you are the primary driver in your household, factors related to you will play a big part in your auto insurance. Where you live, your age, driving record, sex, marital status, and driving experience will all be part of the premium equation. Where you live, your age, and driving record tend to be three of the most emphasized.
Where you live is an important factor in your auto insurance rate. Each town in your state has a rating factor for insurance coverage. The difference in the rates from the inner city to the suburbs can be dramatic, although legislation is periodically proposed, and lawsuits are periodically filed, to challenge or change the legality of considering where a person lives (e.g., the zip code) as part of the policy rating process. This is primarily because there are more accidents and stolen vehicles in urban areas.
Caution: Towns only a few miles apart can have dramatically different rates.
One of the most important primary factors in the cost of your insurance premium is your age. Age is emphasized because it’s easy for the insurer to calculate risk based on a certain age group. Age has a dramatic effect on premiums because, statistically speaking, certain age groups are involved in many more accidents than others. Drivers under 25, for example, pay much higher rates for insurance coverage than do drivers in their 40s. At the other end of the spectrum, drivers above the age of 65 also pay increased rates. Compared to drivers in their 40s and 50s, they have many more accidents per mile driven. An important secondary rating factor is your driving record and the driving records of other people living in your household. Many companies assign points based on the safe driver insurance plan (SDIP). The SDIP lists violations and accidents and assigns a point value to those based on the severity of the violation or accident. Every state assigns points in a different way, so check with your local insurer.
For instance, a speeding ticket may result in a two-point increase on your SDIP.
The more points you accumulate, the higher your rating factor becomes. The higher your rating factor, the more you pay for insurance.
Caution: Some insurance companies assign points to inexperienced drivers even if they haven’t had a traffic violation or accident.
Rating the Car for Collision and Comprehensive
Your vehicle is primarily rated for collision coverage based on:
- The age of the vehicle
- The dollar value of the vehicle
- The deductible amount
- Where the vehicle is located
There are some important secondary factors. For collision rates, an important secondary factor is the symbol group of the vehicle. The symbol group is a rating code designed to reflect the physical damage loss experience for that particular model. It’s reflective of how well the vehicle withstands a crash. The rating symbol group is based on the first eight digits of the vehicle’s vehicle identification number (VIN). Vehicles that are more crash worthy are cheaper to insure than those that are less so. For comprehensive coverage, an important secondary rating factor is how likely your vehicle is to be stolen. Insurance company data show that certain types of vehicles are more likely to be stolen than others. Based on this, vehicles are rated as one of five performance codes:
- Standard (no code)
- Intermediate (“i”)
- Sports model (“s”)
- High performance (“h”)
- Sports premium model (“p”)
Standard performance autos do not increase your rating factor. The rating factor increases from intermediate up to sports premium. Vehicles that are rated as “p” (sports premium) often have the highest comprehensive premiums. Most passenger cars are listed as standard performance vehicles.
Tip: Before you purchase a new car, find out how much the cost of insurance is on that particular model. The collision and comprehensive coverage on similar models can differ greatly. You may save a lot of money on your insurance by buying one model instead of another.
Ways to Reduce Your Auto Insurance Premiums—In a Nutshell
- Shop around! Insurance companies evaluate risk factors differently. It’s not uncommon for one company to charge significantly more than another company for the same coverage.
- Drop the rental car coverage. If you have two vehicles at home, you may be able to get by without this coverage.
- Drop towing and labor costs. If you already have coverage through a different source such as an automobile club, you may just be duplicating coverage.
Drop loss-of-income benefits. If you have a good disability plan at work this coverage may not be necessary. - Have your younger driver take driver’s education courses. Driver’s education often lowers your auto insurance premiums if you have a younger driver in the household.
- Encourage your student driver to get good grades. Some insurers give discounts for good grades.
Raise your deductibles. The higher the deductible, the lower the premium. - Minimize your insurance coverage when you won’t be driving your vehicle for long periods of time.
- If you’re going on a long vacation, you can save money by minimizing coverage (such as collision) on the vehicles you leave at home. Caution: If you cancel comprehensive coverage, however, the vehicle is not covered if it is stolen, vandalized, or damaged while you’re away.
- Inquire about special discounts. Some insurers will give you special discounts for driving under a certain number of miles, being a particularly safe driver, getting good grades, or taking driver’s education courses. Every insurer offers different discounts so there may be one that you can take advantage of.
- Inquire about safety feature discounts. Safety features, such as air bags, anti-lock brakes, and anti-theft systems may reduce your auto insurance premium. Be sure to find out which options your insurer will give you credit for.
- Consider joining a car pool, or take public transportation to work. How far you drive your car to work is a rating factor for your insurance. If your annual mileage is below a certain amount, you may get a discount.
- When moving, check out the cost of insurance in areas in which you might like to live. Where you live is an important rating factor. Living in the suburbs or a rural area will usually be cheaper than living in a city subject to state law.
- Buy cars that are less expensive to insure. Sports cars are much more expensive to insure than the family station wagon.
- Consider purchasing all of your insurance through the same company. Insurance companies often provide discounts to consumers who buy multiple policies from the same company. For example, if you would like to purchase renters or homeowners insurance, you may be able to do so at a discount if you purchase those policies through your auto insurer.
- If changes in your situation might entitle you to a discount (e.g., you move closer to work, or your teenager moves out), tell your insurer as soon as possible.
If you have auto insurance questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
