Car Insurance in 2025: How Premiums are Calculated and Ways to Save

Owning a vehicle comes with many responsibilities, and car insurance is one of the most crucial ones. It protects drivers from financial liabilities arising from theft or damages caused by accidents. Understanding how premiums are calculated can help drivers make smarter choices when buying insurance.

Understanding Car Insurance Premiums 

Car insurance premiums are the amount paid to maintain coverage. Insurance companies determine this cost by evaluating various risk factors. Advancements in data analytics, artificial intelligence (AI), and telematics have enabled insurers to offer more personalised premiums to policyholders. In addition to vehicle, driver, and policy-specific factors, market conditions, inflation, and regulatory changes also affect insurance pricing. So, drivers must stay informed about factors that impact their premium calculation.

Factors That Affect Car Insurance Premium Calculations

Your car insurance premium is determined based on several factors that assess risk and coverage needs. Understanding these can help you manage costs effectively. Here’s what impacts your premium:

1. Vehicle-Related Factors

• Car Model & Make

Luxury and sports cars often have higher premiums due to costly repairs and increased theft risks. Electric vehicles may have different insurance rates depending on battery replacement costs and the availability of spare parts. Standard models with lower repair costs generally attract lower premiums.

• Vehicle Age & Safety Features

Newer cars with advanced safety features like automatic braking and lane departure warnings attract lower premiums. Insurance costs for older vehicles without these technologies may be higher due to increased accident risks.

2. Driver-Related Factors

• Age & Experience

Young drivers, particularly those under 25, often pay higher premiums due to their limited driving experience. Learners and provisional licence holders may also see increased rates. More experienced drivers with a history of safe driving typically receive lower premiums.

• Driving History

A clean driving record with no claims can lead to significant savings. Insurance providers reward safe drivers with no-claim bonuses. Conversely, those with multiple violations, accidents, or DUI (Driving Under the Influence) offenses face higher premiums.

• How Often You Drive

Frequent drivers may have to pay more since their accident risk is high. Those who drive less, such as city commuters or retirees, may qualify for low-mileage discounts. Pay-as-you-drive policies have also gained popularity, offering lower premiums for occasional drivers.

3. Location-Based Factors

• Urban vs. Rural Areas

City dwellers often pay higher premiums due to increased traffic congestion and accident rates. In contrast, rural drivers may enjoy lower costs because of fewer road risks.

• Theft & Crime Rate

Living in an area with high theft rates results in increased premiums. Locations with low crime rates, on the other hand, typically see lower insurance costs. Additionally, parking your car in a secure garage instead of on the street can further reduce premiums.

4. Policy-Specific Factors

• Coverage Type

Comprehensive insurance covers damages, theft, and third-party liabilities, making it more expensive than basic third-party coverage. However, it offers better financial protection.

• Deductibles & Add-ons

Higher deductibles lower premiums but increase out-of-pocket costs when making a claim. Optional add-ons like roadside assistance or rental car coverage can raise premiums, so it’s important to choose only the necessary riders.

Emerging Trends in Car Insurance Premium Calculation

New trends are reshaping how premiums are calculated, making pricing more personalised and fair. Here are some key developments:

1. Telematics & Usage-Based Insurance (UBI)

Usage-based insurance relies on tracking devices or mobile apps that monitor driving behaviour. Drivers who drive safely, maintain smooth acceleration, control their braking, and avoid speeding can receive discounts on their premiums.

2. AI & Big Data in Premium Calculation

Insurance companies now use AI to assess risk profiles more accurately. Instead of grouping drivers into broad categories, AI-driven pricing personalises premiums based on individual driving habits and history, making pricing fairer.

How to Lower Your Car Insurance Premiums and Save on Insurance Costs?

Reducing your car insurance premium doesn’t have to be complicated. By making smart choices and taking advantage of discounts, you can lower costs without sacrificing coverage. Here’s how:

1. Choosing the Right Policy 

Comparing policies from multiple insurers helps you find a plan at your ideal price. A car insurance calculator simplifies this process for you. It also helps you estimate your insurance premium based on factors like your car model, location, and coverage preferences.

2. Choose Add-ons wisely

Add-ons come at an extra cost. So, select only the necessary riders to prevent over-insurance.

2. Taking Advantage of Discounts & Offers

Many insurers offer loyalty discounts, no-claim bonuses, and safe driver rewards. Bundling car insurance with home or life insurance also reduces overall costs.

3. Improving Driving Habits

Maintaining a clean driving record lowers premiums significantly. Defensive driving courses can also qualify drivers for discounts.

4. Opting for Higher Deductibles

Choosing a higher deductible reduces monthly premiums. However, drivers should ensure they can cover the deductible in case of an accident.

5. Using Telematics & Pay-As-You-Drive Plans

Low-mileage drivers can benefit from telematics-based plans that charge based on actual usage. These policies offer significant savings for occasional drivers.

6.  Compare Insurance Providers

One of the easiest ways to lower your insurance cost is to compare different insurers. Policies that seem very cheap might have limited coverage or hidden terms. Reviewing various options ensures that you get the best balance between cost and coverage.

7. Install Safety Features

Cars with advanced security measures such as anti-theft alarms, GPS trackers, and electronic stability control often qualify for lower premiums. These features lower the risk of theft and accidents, making your car a less risk asset to insure.

8. Drive Less

It is considered that the fewer kilometres one drives, the lower the risk of an accident. Some insurers offer pay-as-you-drive policies, where your premium depends on your mileage. If you work from home or use public transport frequently, consider choosing this policy to reduce your premium.

9. Take a Defensive Driving Course

Many insurance providers offer discounts to drivers who complete defensive driving courses. These programmes teach safe driving techniques, reducing your chances of accidents and claims.

10. Review Your Policy Annually

Reviewing your policy yearly helps you remove unnecessary add-ons and ensures you’re not overpaying for coverage. Many insurers adjust premiums based on factors like your car’s age and improved driving history.

Conclusion

Understanding how premiums are calculated helps drivers make informed choices. With the right strategies and customised policies, drivers can enjoy better coverage at lower rates. Always compare options and stay updated on emerging trends to maximise savings in 2025.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

Note to the reader: This article is part of Mint's paid consumer connect initiative and is independently created by the brand. Mint assumes no editorial responsibility for the content, including its accuracy, completeness, or any errors or omissions. Readers are advised to verify all information independently.