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UPDATED: Mar 13, 2020
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Buying car insurance can be very overwhelming when you are not familiar with all of the industry-related terms.
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While some terms will be those that only agents and people who work in insurance will use, there will be some commonly used terms that you will need to familiarize yourself with before you start to compare costs, coverage options and insurance companies.
One term that will apply to every insurance policy purchased in the nation regardless of the type, is premium.
What is a premium in the car insurance marketplace?
In the world of car insurance, a premium is the amount that the insurer expects that you as a policyholder pay to purchase coverage for your vehicle and for your family.
In essence, the premium of a policy is like the price tag on product that you would buy from a retailer. There are premiums for a single coverage, premiums for a single vehicle and then total policy premiums.
No matter which type of premium you are looking at, it will be the amount you have agreed to pay for the term to keep the policy active and to avoid a lapse.
If you are looking at the total policy premium, it is like the bundled price for all of the coverages on all of the vehicles that are listed on the policy. The premium does not include any state fees that are charged to vehicle owners.
It is also not the same thing as a premium payment, although the two are used interchangeably, which is the amount of money you are required to pay based on the installment plan that you choose.
Where can you find your premiums on existing policies?
If you currently have insurance, you might be wondering where you can find the premiums that you are paying on your documentation.
The only place you will find detailed information on your policy premiums is on the car insurance declarations page.
What is a Declarations Page and how is it structured?
The declarations page, which is often called a dec page, is an important document that shows you all of the pertinent information on your policy, the vehicles listed, the driver information, coverage limits, and premiums.
It is the most detailed document that you receive.
Where you will find your premiums on the declarations page will depend entirely on how the company that you are insured with has the page structure laid out. The structure makes it easy for you to access the costs for more than just the whole policy.
On most declarations pages, you will find a section that lists your covered motor vehicles. It will more than likely number the cars, show the model information, show carried coverages.
In the coverages and limits of liability section you will see what your limits are for coverage options like Bodily Injury, Property Damage, Medical Payments, Uninsured Motorist, Comprehensive, Collision, Towing, Labor, Rental Car and GAP. Next to all of the coverages will be a column that says premium.
This may breakdown the premium for every coverage individually to make pricing the cost to drop cover easier.
What can you do with the total premium?
Some companies will only offer you a total premium for each vehicle and not the individual cover. At the bottom of the page you will find a total premium header which will show you the total cost for your coverage for the current term. Comparison shopping is the most effective way to get the best rates.
When you are price shopping to find the lowest rates, this is the premium that you should compare to car insurance quotes to choose the best value.
It is best to get apples to apple car insurance quotes with the same exact coverage options when comparing premiums.
After you do this, you can adjust the coverage to meet your needs and see how these adjustments will change the premiums that you will pay with a new insurer.
How does a company decide what premium to charge?
It is only natural to wonder how an insurer determines how much the company should charge you and other drivers on the roadways. You might think that they simply pull a number from the air or base prices solely on the type of vehicle that you have, but that is not the case.
A lot goes into calculating rates and then determining how much more or less a driver will pay for coverage. Before you really can understand how rates are calculated, you need to learn why it is so important that insurers get your premiums right.
Why is it important for companies to charge the right premiums?
Every insurance company sets their own rates and can decide to charge any premium that is approved by the department in their state.
You might think that it is best for an insurer to keep their premiums low to attract new policyholders and to retain their clientele, but that can be a very damaging decision because of how the market works.
In the insurance industry, premiums are always based on risk. Someone who has a risky car, a risky driving record, a risky commute, or a risky zip code, will ultimately pay more than someone with a very safe car and a blemish-free driving record.
If a company were to charge low-risk premiums to a high-risk customer then they would not be collecting the money that they need to sit in the reserves to pay for the claims that are filed that year.
Insurance is an industry where everyone pays into a pot and the money in that pot will be used on only those who experience a loss. By failing to collect enough from a group of policyholders, the company risks not being able to cover claims which can lead to insolvency.
When a company goes insolvent, it is possible that you could have a claim that will not be paid.
Which risk factors will affect your premiums?
Knowing all of the risk factors that can affect your base rate is important. After all, these are the factors that an underwriter will consider when they are determining what premiums they should charge.
It is not only good to know about the products you are buying, learning about the risk factors can actually help you make changes that can save you a great deal of money. Here are the factors that might be upping your premiums:
Your Driving Record
If your motor vehicle report is showing violations, minor or major, it can affect your rates.
Most companies will only look back 3 years unless it is a serious violation.
If you have a violation that is surchargeable, it can raise your rates for 36 months.
It may also make you ineligible for Good Driver discounts.
Age and Gender
Some think that age is not important, but the statistics show that it is as far as driving is concerned. Age, driving experience and gender all work together in affecting rates. Premiums for very young drivers with only months or years of experience will be higher than premiums for experienced drivers who are over 25.
Males almost always pay more for coverage than their female counterparts because actuaries have found that males cause more accidents because they take more risks.
Your vehicle’s classification and body style will affect your rates. If the structural design of the car leads to more accidents, you almost always pay higher rates. This is also true if a car causes a lot of damage to other cars when it is in an accident.
Not all states allow insurers to consider credit reports, but in states where credit can factor into pricing it has a major affect.
Insurers have found that people with good credit are less likely to file claims. This is why insurers will use credit-based insurance scores to determine if someone is a risk. Check to see if this score can be used in your state.
Use and Mileage
There are three different use classifications: pleasure, commute, and business. People who do not commute or drive to multiple business destinations are assigned a pleasure rating.
This is a low-cost rating and can keep premiums down just like low annual mileage keeps the rates for the car down. The more you drive, the higher the premiums will go.
As you can see, there is a lot to car insurance premiums.
Not only should you know where to review your premiums, you should also know just how your risk class and premium has been assigned. If you are not happy with the premiums that you are currently paying, there are plenty of ways to compare pricing.
By using an online rate comparison tool, such as the FREE one below, you can enter your information and then see what premiums you will be charged by other companies with good reputations.