Gianetta Palmer is a writer for CarInsurance101.com, copywriter, and essayist. Her work has appeared in EverydayHealth.com, Healthline, and The Dyrt Magazine. She is the author of Scrunchie-Fried and writes a lot about car insurance in her spare time.

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Melanie Musson is the fourth generation in her family to work in the insurance industry. She grew up with insurance talk as part of her everyday conversation and has studied to gain an in-depth knowledge of state-specific car insurance laws and dynamics as well as a broad understanding of how insurance fits into every person’s life, from budgets to coverage levels. She also specializes in automa...

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Reviewed by Melanie Musson
Published Insurance Expert

UPDATED: Mar 13, 2020

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Anyone who watches television has probably seen at least one of Allstate’s well-known Mayhem commercials. These amusing ads send a clear message: It’s worth it to pay for more expensive insurance so that you’ll get the coverages you need. While this is true to an extent, insurance is more complicated than this, and the most expensive policy is not always the best. Similarly, the cheapest coverage doesn’t always offer you the protection you need. When shopping for insurance, it’s more important to look at the coverages and benefits of an individual policy than make any decisions based on price alone.

What Determines Insurance Rates

Auto insurance premiums are calculated based on risk. If a company feels it’s more likely to pay for repairs on a vehicle, it will assess higher rates than a vehicle at low risk of being in an accident. Risk is calculated for both drivers and their vehicles; risk also varies depending on your geographic location.

When you receive an insurance quote, your risk level is assessed and your rates are calculated based on that information. This is why your premiums may cost more than your friend’s for an identical policy; it’s also why your insurance costs might change after you purchase a new vehicle or move to a different state.

Why Insurance Rates Vary From One Company to the Next

Risk is not the only factor involved in determining the cost of your car insurance. Different insurance companies may have very different costs for similar policies. This happens because some insurers are eager to attract certain clients and will offer the best discounts to those individuals. For example, The Hartford offers more discounts to senior citizens than its competitors, while other companies offer the best discounts to students or military personnel.

Different companies also have different budgets and can afford to offer better discounts than others. For example, State Farm is a mutual company, so it can run with much narrower profit margins than its publicly traded competitors. This is why State Farm can routinely offer cheaper policies than many other companies of a similar size.

In addition to various discounts and base rates, insurance companies can modify the cost of your coverage by modifying your coverages. For example, your agent may reduce your liability limits, increase your deductibles or drop certain coverages altogether. This is a good way to save money on your premiums, but it can be risky if you don’t realize what you’re cutting. This particular practice is what the Allstate commercials refer to when they mention “cut rate insurance” as leaving customers unprotected.

Some insurance companies are more likely to do this than others. For example, Progressive offers a “name your own price” feature that allows customers to pick premiums and matches them with insurance that would cost that amount. This can lead to policies that are much more bare-bones than the customer may realize. In other cases, agents might reduce the cost of insurance dramatically by changing coverages without explaining these changes; the customer will be satisfied with the low rates until realizing that the policy actually won’t cover everything.

Choosing the Best Policy

Not all cheap insurance policies benefit from trimming coverages. In many cases, the affordable policy you enjoy is simply the result of qualifying for good discounts. Nevertheless, you need to know what you’re buying and be able to communicate freely with your insurance agent. Before buying a policy, be sure you know the answers to the following questions:

  • What coverages are included on the policy, and what do they do?
  • What are my liability limits? What happens if these limits are exhausted?
  • How much protection do I have for my own car?
  • How much is my deductible? Can I afford it if I get into an accident?
  • Do I have medical coverage? What’s the limit? Is there a deductible?
  • Will my insurance pay for everything I need it to do?

Once you’ve determined that you have all of the coverages that you need on the policy, you can work with your agent to tweak the policy to fit your budget without sacrificing too many coverages. However, you do need to recognize that you may not be able to get everything you want for the price you want to pay. If you need very cheap insurance, you may need to sacrifice some coverages. Depending on your situation, it might be best to accept the higher premiums than opt for the cheapest possible policy that might not cover your needs.