Premium Costs

Premiums are the payments you make to your insurance company for your insurance policy. 

What are insurance premiums?

The monthly payments you make to your insurance company for car insurance coverage is called your “premium.” Hey, it sounds a lot fancier than “the money you owe.”  

Often, policyholders have the choice to pay monthly premiums, or to make their payments on a bi-annual or annual basis instead. 

How much is car insurance? That depends on a bunch of different factors. Your insurance premiums reflect the combination of your risk profile, the coverage limits you choose, and your annual deductible. 

How do deductibles impact insurance premiums?

A deductible is the amount of money you pay out-of-pocket towards an insurance claim before your insurance coverage kicks in. Choosing a high deductible means your insurer would have to cover less of an accident’s total cost, so a high deductible leads to lower insurance premiums. The insurer has less risk of loss with your policy. 

When pricing out insurance policies, add your deductible to your premiums to get total out-of-pocket costs. If you can’t cover the deductible, pick a lower amount even if it would lead to a higher premium.

How do coverage limits impact insurance costs?

Coverage limits set a cap on an insurer’s maximum payout if you’re in a covered accident (after you’ve paid your deductible). The higher your limits, the more an insurer might have to pay out. Therefore, higher limits equals higher insurance premiums. 

Most state laws require that drivers carry minimum coverages for bodily injury and property damage liability to protect other drivers on the road. Bodily injury liability pays for another person’s medical bills and doctor’s visits if you’re the at-fault driver in an accident. Your policy contains a per person and per accident limit. Property damage liability, meanwhile, covers the costs of damage to someone else’s property.

Carrying the minimum required coverage is risky—after you hit that limit, you’re responsible for any extra accident-related costs. If you don’t get into a single crash or fender bender, it might work out fine. But in the case of an unexpected collision or mishap, you may end up regretting your decision to go with barebones coverage. 

Car insurance policies contain several types of maximum limits which you can select when getting a quote.

How does your risk profile impact insurance premiums? 

When you apply for a new car insurance policy, insurers ask questions to determine your risk profile. They’re not interested in your Netflix queue, or if you’ve ever climbed Machu Picchu (but if you have, that’s cool!). They price a policy based on the likelihood that they’ll have to pay out for an accident or incur other costs. When pricing a policy they’ll look at:

  • Your driving record
  • Any DUIs or restrictions on your license
  • Where your car is parked when you’re home
  • How many miles you drive annually
  • Your credit score

It’s probably pretty clear how your driving record and any restrictions impact insurance premiums: If you’ve been in a few car accidents, you’ll pay higher premiums. 

But what does your credit score have to do with anything? Well, it’s seen as a measure of your ability to manage money and possibly pay a deductible. 

What about the address where you park your car, and how many miles you drive annually? There’s a simple reason why insurers care about this info. 

The more miles you drive, the more you’re on the road, and the greater likelihood you’ll get in an accident. If you live and park your car in a higher crime neighborhood, insurers think there’s more risk of a break-in or vandalism damaging your car. Both of these factors can increase risk for an insurer, and insurers mitigate risk by charging you higher premiums.  

Think of it this way: The guy who drives 20,000 miles a year and lives in New York City is going to have higher premiums than the one who drives 3,000 miles a year and calls rural Indiana home. 

Please Note: These definitions don’t alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade. They are intended for educational purposes only - they’re not meant to be used in lieu of professional legal or financial advice. We’ll do our best to keep them updated, but they may not always reflect current industry developments. Feel free to use the terms with attribution (friends don’t let friends plagiarize!)
Property and casualty insurance provided by Lemonade Insurance Company, 5 Crosby St., 3rd floor, New York, NY 10013. Life Insurance provided by North American Company for Life and Health Insurance®, Administrative Office, One Sammons Plaza, Sioux Falls, SD 57193.
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