Many consumers are surprised when they pay their first car insurance premium on a brand-new vehicle they recently acquired. In most cases, the car insurance agency charges more for new vehicles—compared to used vehicles—for several reasons. Not all of the increase in insurance premium for a new car is related to the higher sticker price. Auto insurance rates for new vehicles are pricier due to replacement cost of parts, special types of coverage buyers opt for, costlier repair bills, and more stringent lienholder requirements.
Factors That Affect Premiums
When you compare car insurance premiums, remember to take the following factors into account for your new car’s total premium expense:
Sticker Price: There’s a common myth that the sticker price is the only, or the primary, factor that affects premiums. That’s not true. It is true, however, that a vehicle’s price tag is an important piece of the reason for higher insurance expenses on new vehicles. Why?
The answer is that insurance companies need to protect their interest, which means newer cars, which almost always have the highest sticker prices on the lot, come with higher insurance rates. But, as you’ll notice below, there’s much more to the equation.
Coverage Limits: As is the case with homeowners insurance, coverage limits play a key role in total premiums for car owners. Whether you purchase liability coverage, comprehensive, collision, or some other type of coverage, each category comes with its own dollar limit. If you want to bump up those limits, you pay extra. When people buy new cars, they often look at the sticker price and base their coverage limit decisions on that amount. Thus, sticker price indirectly plays a role here, too.
But there’s something else at work: owners of new vehicles take possession of pristine, flawless products and typically don’t want to worry about getting even a scratch on their new vehicles. This sort of “proud-parent syndrome” is pretty common among folks who buy brand-new cars. Thus, they tend to opt for higher-than-necessary coverage limits in many cases.
Deductibles: Closely related to the above point, buyers of new models often want to keep out-of-pocket costs low by choosing very low, or even zero-dollar deductibles. Of course, you’ll pay for this luxury with a higher premium but will be pleasantly surprised at the minimal cost to you if you’re involved in an accident.
Repair Costs: Inflation means that vehicle prices, repair costs, and replacement costs go up every year, even if only a small amount. It costs much more to have a new car repaired than to have a used one fixed. If you finance the vehicle, the lender often requires that you only use new or factory-approved parts when doing a repair.
Replacement Cost: Closely related to repair bills is the concept of replacement. If your new car is stolen, the cost to give you a fresh one is quite high, so if you opted for theft/replacement cost due to personal preferences or lender requirements, you’ll have a higher premium.
Lender Requirements: This is the factor that consumers often overlook when the time comes to insure their vehicles. The vast majority of buyers finance their purchases either through a bank or a dealership. That means they don’t get to decide on how much or what kind of insurance to buy. They’ll usually be forced to pay for higher comprehensive coverage on the vehicle, which can be among the priciest of all coverage types.
Extras: Many buyers of new cars want all the extras they can get to protect their new ride against theft, broken windshields, and more. Insurance carriers offer all sorts of additional coverage—all the bells and whistles. When consumers purchase a new car, particularly if it’s the first new vehicle they’ve ever been able to afford, they often opt for every possible “extra” the insurer offers, like rental coverage, enhanced roadside assistance packages, tow insurance, and locksmith/lockout add-ons to policies, etc.
All these additional forms of protection come with a cost and often lead to much higher premiums for new car owners.
There are lots of factors at play when it comes to the way an auto insurance agency sets rates on new vehicles. Even though every car insurance agency does not use identical rate-setting criteria, the end result for a buyer of a brand-new car is a higher annual cost for coverage.
How to Make a Realistic Comparison
The time to think about insurance cost is when you are planning to purchase a new vehicle. Don’t wait until your loan is approved or you and the dealer agree on a price. You don’t have to know the make or model of the car you will buy in order to do insurance research.
In short, spend an hour or so, several weeks before you set foot on the dealer’s lot, checking out all the fine points of auto insurance rates. You should be able to at least ballpark your annual premium, select a reputable agency, compare car insurance for models you’re interested in, and know what to expect in terms of total insurance costs.
Reputable carriers like Oxford Auto Insurance offer reasonable rates for vehicle insurance on both new and used models. Experienced insurers can assist buyers in keeping their premiums as low as possible while still getting them the amount of coverage they need. An Oxford Auto Insurance professional can answer questions before you set out to shop for cars. Then, when it’s time to visit the dealership, you’ll be armed with all the information you need to make an informed decision.