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How Do Car Insurance Premiums, Deductibles and Limits Work?

Updated: March 2017

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I've heard about car insurance premiums, deductibles, and limits, but what exactly are they?

Headshot Charles Webb.

Knowing what basic car insurance terms mean can help you better understand your policy, says Charles Webb, an Allstate agent based in West Des Moines, Iowa. In particular, Webb says it's important to know what premiums, deductibles and limits are in relation to your car insurance.

"Knowing your deductible and limit is essential to understanding your coverage benefits. And your premium is an essential part of your insurance policy's pricing," says Webb.

Webb explains how each of these separate components affect your insurance pricing and benefits.

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Car Insurance Premiums

Simply put, say Webb, your car insurance's premium is the regular amount you pay for your car insurance. In some cases, you'll pay the premium on a monthly basis. Depending on your plan or insurer, however, you may pay it in larger chunks, such as once every three or six months.

Webb notes that how much you pay for your premium is based on a number of factors.

"Your insurance premium can depend on a variety of things, such as your age, driving record, car make or year, and the type of insurance you want — such as comprehensive coverage versus liability, or coverage for additional drivers," he says.

It's important to understand the factors that may affect your premium, because Webb says some of them — such as driving record — are within your control.

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Car Insurance Limits

Your car insurance limit, on the other hand, refers to the highest total amount your insurance will pay after an accident. For example, says Webb, if your coverage limit is $50,000 and your accident ends up costing $55,000, you would be responsible for the additional $5,000 that isn't covered.

"Your limit is an important number — maybe the most important number — in understanding your coverage benefits," says Webb.

Often, car insurance coverage limits are described in "per-person" versus "total" limit terms. For example, your bodily injury liability limit may be $50,000 total, but only $25,000 for each injured person, for example. Check with your agent to understand your per-person and total limit details. Consider that your policy's limit will also affect your premiums. The higher the limit, the higher premium you typically pay. You can work with your agent to choose the limits that offer the right protection to suit your needs.

Car Insurance Deductible

A deductible is the amount you'll pay out of pocket for a claim before your insurance coverage kicks in.

"Let's say your deductible is $1,000. You'll need to pay that first thousand before your insurance begins covering the remainder of the cost of the accident, up to your limit," Webb says.

Say, for example, you have collision coverage with a $1,000 deductible and $50,000 limit. If you're in an accident that costs $10,000, you'll pay the first $1,000, and your insurance may cover the remaining $9,000. It's not unlike health insurance deductibles, in that the higher your deductible is, the lower your premium payment may be. Talk with your agent about choosing a deductible amount that fits your budget.

Limits, deductibles, and premiums are distinct, but interlinked, car insurance concepts with which you should be familiar in order to best meet your coverage needs.

"Your insurance agent can help you make sense of them and select the limit, deductible, and premium levels that make sense for you," says Webb. "So stay in touch with them regularly and keep them informed of any changes to your household's situation or insurance needs."

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This content is for informational purposes only and may not be applicable to all situations.

Coverage subject to terms, conditions, and availability. Policy issuance is subject to qualifications. Allstate Insurance Company, Allstate Indemnity Company, Allstate Fire and Casualty Insurance Company, Allstate Property and Casualty Insurance Company, Northbrook, IL. © 2019 Allstate Insurance Company, Northbrook, IL.
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