Many people are confused when they receive vastly different auto insurance quotes from different companies.
Why should there be such a large discrepancy? How do auto insurance providers determine a rate quote?
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There are several factors that can be used, and they vary from provider to provider.
Credit rating
Your credit rating does not just impact how easily you can obtain a car loan. It is also used to determine your auto insurance rate.
According to Insurance.com, many insurance providers will run a credit check based on specific parameters, such as how often you've been late paying bills.
Auto insurance companies use your credit rating because it tells them how likely you are to pay your premiums on time. A lot of late payments indicate an unstable financial situation, which means they are going to charge you more because you constitute more of a risk.
Steve Pape, an insurance agent for Midwest Insurance Group outside of Milwaukee, explained that some companies use credit scores for determining discount rates, while others use it to determine which rating tier a driver falls into.
"In determining rates, your score is used in conjunction with your claims history, driving record and other factors," he said.
Driving habits
There are several ways that your auto insurance rate can depend on your driving habits.
State Farm lists where you drive, how often you drive, how far you drive and your driving record as factors when issuing a quote.
For example, if you drive 30 miles to work every day, your auto insurance rate will likely be higher than someone who works right around the corner from his house. That's because the longer you are in your car, the higher the likelihood that you will be in an accident.
Similarly, if you live in a high-crime area where car theft is more common, you will be considered more of a risk.
Your vehicle
The next factor that is often used to determine your auto insurance rate is the type of vehicle you drive.
More expensive cars yield higher premiums in most cases, while a cheaper car will be less expensive to replace should it be stolen or totaled. It is important to consider potential insurance costs when buying a new car.
You might also qualify for discounts on your auto insurance rate if your car is equipped with certain safety features such as air bags and rear-mounted cameras. You can discuss those discounts with your insurance provider to see how much of a discount they can offer.
Type of coverage
According to FreeAdvice.com, there are five basic types of auto insurance coverage: bodily injury liability, property damage liability, uninsured (or underinsured) motorist, collision and comprehensive.
Most states require that drivers carry a minimum of liability insurance; other types are optional.
The more auto insurance you purchase, the higher your rate will be. However, paying a higher monthly premium means that your out-of-pocket costs should something happen will be considerably smaller. It all depends on what you are willing to gamble with your car and safety.
Personal data
Your auto insurance provider will also take into consideration your personal data.
Your age and gender, for example, are considerable factors. Older drivers are considered better risks because they have more experience and therefore enjoy lower quotes. And since male drivers are statistically more likely to get into an accident, they often pay higher premiums than female drivers.
Where you live also plays a part, Pape said.
Each insurance company divides the states that it covers into territories. Each territory is given a number. Base rates are often calculated using historical traffic and accident data. If there are an unusually high number of collisions in one territory, for example, the liability and collision premiums for that area will be greater than a territory that has a history of very few collisions.
Longevity with a specific insurance carrier is also an important consideration.
"We give continuous service discounts," Mike Jones, an agent with Alfa Insurance Company in Montgomery, Ala., told Bankrate.com. Those discounts wouldn't apply if you were a new customer with a new insurer.
In addition, long-term clients with Jones' company who have clean driving records are more likely to be forgiven after a claim, so they wouldn't face premium penalties.
"If that same customer switched policies, then had that same claim, they probably would have a surcharge (at their policy's renewal)," Jones said.
Having kids
While just having children won't drive your auto insurance rates up, having children who are driving will.
"If you have children, your rate shouldn't go up," said Pape. "If you have children who are driving, expect to pay much more for your auto insurance as young drivers are indeed inexperienced drivers."
But, having a child who can drive doesn't mean your rates will go sky-high. Many insurance providers offer "good grades" incentives that can offer parents some relief.
And Kansas Insurance Commissioner Sandy Praeger said parents should be sure to remember to notify their insurance agent once their children leave home.
"Make sure you let your insurance company know that it's just you and your spouse driving, that those reckless teenagers are gone and are not driving that car," Praeger said.
Driving history
The final factor that will be considered in an auto insurance quote is your driving history, which includes claims, accidents and moving violations.
When you receive a ticket or summons from a police officer for speeding, your premium might increase. The same goes for accidents that you report to your insurance company.
Your auto insurance rate is calculated differently depending on the provider you choose. The best way to handle this is to request quotes from as many providers as possible to find the best deal.
The National Association of Insurance Commissioners recommends that consumers review car insurance policies every year.
There are many benefits to annually reviewing your car policy. Either you'll confirm that you have the right coverage for your needs, or you'll gather crucial information for making smart decisions about switching providers.
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