Whether you’ve been paying your own auto insurance premiums for decades, or are a new driver about to take them over from your parents for the first time, you may be wondering how premiums are calculated.

Well, many factors combine to create premiums, and they can vary widely from person to person, policy to policy. To better understand how your car insurance premium is calculated, let’s start with the basics.

1. Premiums reflect your needs – Your auto insurance premium reflects things like the make, model and year of your insured car(s), the number of insured vehicles on your policy and the number of insured people on your policy (for instance, adding a teen driver might increase your premium).

2. Coverage limit – Your coverage limit is the highest dollar amount the insurance company will pay on a claim. The higher your coverage limit, the more coverage you’ll receive, but you’ll generally pay higher premiums for that coverage.

3. Deductible amount – Your deductible is the amount of money you’ve agreed to pay on your own when you make a claim that’s covered by your policy. Typical deductibles are $500, $1,000 and $1,500. A lower deductible means you’ll pay less out-of-pocket after an accident; however, this increased coverage will result in a higher premium.

4. Driving record – When being considered for auto insurance coverage, most insurance companies will check your Department of Motor Vehicles (DMV) record for the past 36 months to see what kind of driver you are. If they’re investigating past accidents, they may look back 60 months.

A clean driving record means you’ll likely pay a lower premium, as well as qualify for money-saving discounts as a result of your safe driving. Alternately, if you have a number of moving violations, accidents or previous insurance claims within that time period, you may have to pay a higher premium to cover the additional risk associated with poor driving records.

5. Insurance score – Outside of your specific policy features, one of the most important factors used to determine your premium is your insurance score, which is based on a number of the same factors that determine your credit score. These include: long-established relationships with credit lenders, low debt balances and a low number of recently-opened accounts. These factors are considered an excellent predictor of the insurance losses you may incur in the future.

Courtesy of ARAcontent