10 Key Factors That Determine Your Car Insurance Premium

When it comes to car insurance, the premium you pay is not just a random number. It is calculated using a range of factors that help insurers assess the risk and cost associated with covering your vehicle. Understanding these key determinants can help you manage your premium better and make informed decisions when selecting or renewing your policy.

Whether insuring your car for the first time or switching to a new provider, awareness of what affects your premium is essential.

Top 10 Factors That Determine Car Insurance Premium

1. Type of Car Insurance Policy You Select

There are two major types of car insurance in India:

• Third-party insurance: This is mandatory under Indian law and covers only third-party liabilities like injuries or damages caused to others by your vehicle.
   
• Comprehensive insurance: This covers third-party liabilities as well as damages to your own vehicle due to accidents, theft, fire, natural calamities, and more.

A comprehensive policy offers broader protection but comes with a higher premium than third-party insurance. Therefore, your choice of policy has a direct impact on the amount you pay.

2. Insured Declared Value (IDV)

Insured Declared Value (IDV) is the current market value of your car, which is the maximum amount the insurer will pay in case of total loss or theft. The higher the IDV, the higher your premium.

IDV is influenced by your car’s make, model, age, and depreciation rate. Most insurance companies allow you to modify the IDV slightly. Use a car insurance calculator to adjust this value and understand how it affects your premium.

3. Make, Model, and Variant of the Vehicle

Your car’s brand, model, and variant significantly affect its insurance premium. A hatchback usually has a lower premium than an SUV or a luxury sedan. Cars with higher engine capacities or powerful performance features are considered high-risk and are more expensive to insure.

Even fuel type plays a role. Due to higher repair costs, diesel vehicles often have higher premiums than their petrol counterparts.

4. Age of the Car

As a car ages, its value depreciates. This lower value translates to a reduced IDV, which brings down the premium. However, if the vehicle becomes too old, the chances of mechanical breakdowns increase, and insurers may apply a higher risk rate, thereby increasing the premium slightly.

Insuring older vehicles may sometimes involve additional inspections or documentation, especially for comprehensive plans.

5. Location of Registration

The geographical location where the car is registered also plays a significant role. Cities with high traffic density, such as Delhi, Mumbai, or Bengaluru, are more prone to accidents and thefts. Therefore, insurance premiums in urban areas tend to be higher than in rural or semi-urban regions.

This factor also includes where the car is usually parked — a vehicle parked in a secure, private garage is seen as less risky than one parked on the street.

6. Age and Driving Experience of the Policyholder

Insurance companies view younger drivers, especially those under 25, as high-risk due to limited experience and a statistically higher chance of being involved in accidents.

On the other hand, older and more experienced drivers often receive lower premiums, provided they have a clean driving record. Long-term claim-free experience builds trust and reduces perceived risk.

7. Claim History and No Claim Bonus (NCB)

If you have a history of not filing claims during your policy term, you become eligible for a No Claim Bonus (NCB). This bonus can significantly reduce your renewal premium, starting from 20% after the first claim-free year and going up to 50% for five consecutive claim-free years.

However, even a single claim can reset the NCB. Therefore, it’s advisable to avoid small claims and preserve your bonus.

8. Add-ons and Optional Covers

Add-ons are extra benefits that can be attached to a comprehensive policy. Popular add-ons include:

• Zero Depreciation Cover
   
• Engine Protection Cover
   
• Return to Invoice Cover
   
• Roadside Assistance

Each add-on increases your coverage but also adds to your premium. While these may be optional, many are beneficial in real-world situations. Evaluate which ones are truly necessary for your vehicle and usage pattern.

9. Voluntary Deductible

A deductible is the amount you agree to pay from your pocket during a claim. Every policy includes a compulsory deductible, but you can opt for a voluntary deductible to lower your premium further.

For example, if you agree to pay ₹5,000 out of a ₹15,000 repair bill, the insurer pays the remaining ₹10,000. While this reduces your premium, it increases your out-of-pocket expense. Choose this option if you’re confident about managing minor damages yourself.

10. Safety and Anti-Theft Features

Insurers consider vehicles equipped with certified anti-theft devices and advanced safety features low-risk. These features reduce the chances of theft or severe accident damage, which in turn helps lower the premium.

Installation of ARAI-approved devices can even fetch you a small discount. Cars with airbags, ABS, GPS tracking, and immobilisers may benefit from these reductions.

Use a Car Insurance Calculator for Accuracy

A car insurance calculator is an excellent online tool that helps you estimate your premium based on your car’s model, IDV, location, and desired add-ons. It allows you to compare different plans and customise your coverage easily.

Digit Insurance, for instance, offers a smart calculator to customise your premium and add-ons. Their 2025 Transparency Report reveals that 69% of car insurance claims were approved within 12 hours, showcasing speed and consistency that few in the industry match.

Understanding the components that impact your car insurance premium helps you take control of your policy costs. Every factor plays a vital role, from the vehicle type and policy selection to the inclusion of add-ons and claim history. Always review these aspects and use online tools to compare your options. Don’t simply go for the cheapest premium; aim for a plan that gives you the right coverage at the best value.