Why is Car Insurance so Expensive?

In the United States, the average auto insurance policy costs $1,548, or about $129 per month. Even though the COVID-19 pandemic resulted in auto policy premium reductions for thousands of Americans, the costs of coverage remain both ongoing and foundational shares of the average American’s household budget. 

Many factors go into calculating the costs of your car insurance premiums, which can vary significantly from policyholder to policyholder. When quoting your policy, your insurer will examine numerous risk factors to determine how likely you are to file a claim on that coverage. The more likely you are to file a claim, the more you are likely to pay for your premium. Insurance companies don’t want you to file a lot of claims, since it costs them money. That’s why they charge more for drivers who they believe are more likely to file claims. 

Still, all insurers and all drivers vary, which is why a policy that is expensive for one driver might not be as expensive for another. That’s why your independent insurance agent is committed to helping you find the policy that always offers both optimized coverage and optimized costs. 

Let’s take a closer look at how risk factors influence auto insurance premiums, and why those risk factors might actually drive your rates up. 

Why Does Price Rise When Claims Risks Increase? 

The simple fact of the matter is that some people are more likely to file auto insurance claims than others. Some are also more likely to file high auto insurance claims. In either scenario, the insurer faces a higher risk of having to pay a significant amount of money to the policyholder. 

For example, 16 – 25-year-old males are some of the highest risk drivers on the road. Primarily, young adults do not have the experience behind the wheel to truly know all the ins and outs of what it means to be a safe driver. Additionally, they are more likely to speed and engage in other aggressive driving tactics. Often, they are the demographic of drivers who are most likely to be involved in fatal accidents. As a result, insurers frequently have to charge these drivers more money, on average, across the board for their coverage. 

Still, age and gender aren’t the only influences on your car insurance rates, however. Car insurance premiums also depend on your: 

Location 

If you live in an area with a high cost of living, or with a higher number of local drivers, then you are likely to pay more for your coverage. The simplest explanation for this trend is the fact that the more drivers that are on the road around you, the more likely you are to be involved in an accident. Overall, that equals a much higher chance of your insurer having to pay out on your behalf. 

Vehicle model, safety rating and value 

Expensive vehicles, sports cars and vehicles modified for speed will all cost more to insure. They simply represent a higher amount of money that will be paid by the insurer in the event of a wreck. 

Vehicles with high safety ratings, on the other hand, typically cost less to insure. If you want to save money on car insurance, you may want to purchase a vehicle with a high safety rating. Or, by investing in a certified used vehicle, you will still get a quality set of wheels without having to worry about a significant value that insurance now has to cover. 

Credit score 

Credit scores show an insurance company how reliable you will be in paying your bills in full and on time. Therefore, they will know that you have a very low risk of defaulting on your payments and letting your policy lapse. 

Furthermore, good credit also shows the insurer that you have more financial stability, which might make you less reliant upon them following relatively minor vehicle damages. All in all, good financial stability might show them that you are a good investment, and they might reward you with lower premiums. 

Driving record 

If you have numerous infractions on your driving record, then you are clearly demonstrating to your insurer that you are a high risk to insure. As a result, they will likely charge you much more than someone who has a clean record. On average, a single accident could raise your auto insurance rates by more than 30%, and some insurers will even terminate coverage for drivers with a particularly severe history on their record. 

Coverage limits 

 The more coverage you have, the more expensive your insurance will be. There are some coverages you must have as required by state law. In Texas, for example, you must carry: 

Other types of coverage, such as physical damage insurance, are optional, but might still prove essential to your needs. While adding benefits to your plan might raise your premiums, your agent will be able to work with you to still ensure that you don’t face astronomical price increases as you work to achieve the coverage that is truly both affordable and effective.