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How Are Car Insurance Premiums Calculated?

calculating insurance premiumIf you’ve been wondering how auto insurance companies in Miami, Florida calculate your premiums, then read this article. It’s all driven by risk and profits. The type of vehicle you drive is one risk factor, for example, but there are others. Some of them you can’t control and others might surprise you. After understanding the premium components, you’ll be able to adjust your lifestyle and priorities in certain areas to ensure your payments remain as low as possible.

The Profit Incentive

Insurance companies are businesses that have employees, buildings, travel expenses, corporate jets and other operating costs that have to be paid for. Plus, they want to make a profit on their business efforts. They are not a charity.

So like any good business, every insurance company creates a budget plan that forecasts how much money it wants to earn and spend each year. Much of the money it earns is obtained through the premium payments we make to them.

So from a big picture vantage point the auto insurance company has its revenue goal. But from that overview, there are specific risk factors that apply to you that will determine how much you will contribute to their bottom line. The bigger the risk you are, the higher your premium rate will be.

Now, there’s one thing you shouldn’t assume. Just because a company here in Miami is well-known or very large, it doesn’t automatically mean insurance premiums will be higher than those offered by smaller companies or vice versa.

A big company could be running very efficiently and have a large pool of policy holders that result in premiums that are reasonable. On the other hand, you could have a small local insurance company that is greedy, run poorly, and writes lousy policies. The bottom line is that you have to do your homework and check each company’s background.

Risk Components

insurance risk componentsVehicle Value – if you have an expensive car, expect to pay more for automobile insurance. Of course, luxury vehicles are usually equipped with the latest in safety technology and theft protection so that will work to your benefit.

Age – if you’re a male under the age of 25, you’re going to pay the highest rates for insurance. That’s because insurance companies have found that this age group is more likely to speed, break driving rules, and take more risks. Women of this age will pay a little less. On the other hand, if you’re age 45-65 you pose the lowest risk. By the way, if you’re a parent, you’re better off not adding your child to your policy. Get a separate one.

Vehicle Usage – if you live in a large urban city, your rates will be higher than those of someone living in a rural area. There’s just a greater potential for accidents on busy streets.

Driving Record – if you have tickets, dui’s, accidents, and other negative driving events that are a part of your driving history, you’re going to pay higher premiums. The number and severity of the negative events will determine how high.

Credit History – insurance companies want to verify your ability to pay and whether you’re a trustworthy citizen. A poor credit history could result in them denying you coverage all together or assigning a higher premium.

Now, there are a few things that could help get cheap auto insurance in Miami beyond very basic PIP coverage. Some insurers may cut you some slack if your vehicle has theft protection, an alarm system, anti-lock brakes, and airbags. Owning your home could be helpful as well. Also, if you work for certain organizations like the government, military, hospital or school system you might catch a break. Be sure to ask your agent about this.

So now you know how insurance companies calculate premiums and what you can and can’t do to impact them. Naturally, you can’t change your age overnight. But you can drive responsibly, choose a practical vehicle, and keep your credit in order. And always ask the agent if there are any special discounts available when you get quotes.