UPDATED: Mar 13, 2020
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In order to fully understand the cost of auto insurance, you need to first put yourself in the shoes of the auto insurance companies. Think about it – insurance companies are businesses. They need to stay profitable, yet they also need to make sure that people want to buy their product. The following three things are characteristics that most auto insurance companies in the United States share:
- They are all masters of risk assessment. They need to charge customers who appear to be of “higher risk” more money and customers who appear to be “lower risk” less money.
- They need to accurately balance their risk because they have expenses to pay. They have to make sure they are able to pay policyholders’ claims as well as pay their own business operating expenses (employee salaries, office space rent, utilities, etc.).
- At the same time, they need to keep their prices low. They need to stay competitive with other insurance companies if they want to survive.
How much you pay for insurance is dependent on many factors including driving history, the car you drive, your age, gender, and credit score. What customers often do not realize is that one of the biggest factors is the state you live in. All states have their own auto insurance rules and regulations. Insurance companies have to abide by these rules, and therefore, insurance rates vary state-by-state.
According to the Insurance Information Institute (III), the most expensive state for automobile insurance in New Jersey, with an average yearly expenditure of $1,184. The second most expensive state is New York and the third most expensive state is Massachusetts. High traffic and congestion, old roads that need repairs, nasty winter weather, and high taxes all play roles in the high costs of auto insurance in these states. On the other side of things, sparsely populated Midwest states North Dakota, Iowa, and South Dakota are the cheapest places to insure your car. In North Dakota, which is last on the list, the average driver only pays $554 on insurance per year! (Note – These “averages” are calculated by adding up all the liability, comprehensive, and collision premiums in the state and dividing it by the number of cars on the road.)
How do insurance companies determine my risk?
Apart from state regulations, what you pay on your insurance is largely determined by your perceived risk. Most auto insurance companies divide risks into three groupings: preferred risk (low risk), standard risk (average risk), and non-standard risk (high risk). Like stated above, they will look at your driving history, the car you drive, your age, gender, and credit score in making these judgments. They will also look very closely at how often you drive and what you use your car for.
To get an idea of what a non-standard risk driver (high-risk driver) might look like, picture the following:
- 20-year-old male
- Lives in a dangerous part of town
- Drives a BMW convertible
- Has a past DUI conviction
- Has been in 2 serious accidents
- Has two speeding tickets in the past year
That is what a high-risk driver will look like. His insurance will be a bit higher than a low-risk driver, which might look like:
- 31-year-old Female
- Flawless credit score
- Drives a minivan
- Combines her policy with her husband’s
- No prior traffic violations
- Never been in an accident
How much can you expect to pay for insurance?
According to the III, the average cost per auto insurance in the United States is $829. If you consider yourself to be an “average” driver (you live in an “average” state, have an “average” driving record, etc.), you should expect to pay somewhere around that price. As stated above, however, there are many factors that your auto insurance rate is based on. Unless you know every insurance company’s complex algorithm in determining insurance premiums, you probably will not be able to figure out your rate on your own.
Apart from the insurance company’s risk evaluations and your state laws, you also need to take into consideration how much coverage you want to buy and your deductibles. If you buy “full coverage” including liability, comprehensive, collision, and medical, you can expect to pay more than someone who just buys the bare minimum. Also, generally speaking, if you increase your deductibles, your premiums will decrease.
The one way to “be sure” how much your auto insurance is going to cost you is to shop around. There are many insurance websites on the internet (including 4AutoInsuranceQuote.com) that provide free insurance quotes. Your best bet is to use these services as they are fast, convenient, and most importantly – free! Use the quote box at the top of this page to get started. Good luck!