Clearly, income isn’t a factor used directly in vehicle insurance pricing as insurers don’t ask applicants’ income. However, there are many indirect ways to take an applicant’s socio-economic background into account and rate accordingly. As a result, not only do low income motorists may get charged more but also they would feel the pain of higher auto insurance costs more because premiums take proportionately more money out of their pocket in comparison to someone with better pay and the same premium.
Traditionally, driving experience, insurance and claim history and driving records were the main factors considered when calculating automobile insurance prices. Lately underwriters are using so many new factors to assess risks. Some of these metrics like credit score, education, profession and zip code are not favoring middle to low-income families. On the other hand, they may help higher income motorists get better rates for reasons that have nothing to do with driving but a lot to do with socio-economic factors.
A study carried out by the Consumer Federation of America (CFA) tested the assumption that driving records would still be the key factor in getting low car insurance rates. The study checked prices in fifteen cities. They searched quotes for basic liability coverage for low to middle income applicants with good records.
Nearly sixty percent of the quotations were over $1000 and that of over thirty percent were over $1,500. It was quite surprising to see that low income drivers are charged over $1,000 for basic coverage even though they had clean driving history. The average cost of minimum state required liability auto insurance in the US is $622 in 2023 and the study was carried out ten years ago. You would expect city rates to be higher than average but it must be conceived that there are other factors in play here as well.
According to the same study, the better off drivers got on average twenty five percent better car insurance rates than the applicants with similar particulars but from poorer backgrounds. For example, a married male driver with good education and own home in a nicer part of the town would get much cheaper vehicle insurance quotes compared to a single parent in a struggling neighborhood in a rented apartment.
This distinction was much clearer with some auto insurers and in large cities where the difference in premium between a poor and rich driver was as much as 60% on average. Although it was still higher, some companies were better than the others. For example, State Farm was charging about 13% higher rates to financially struggling drivers, in comparison to 92% higher rates charged by GEICO in the sample cities. This goes to show that you should always shop around before buying a policy.
Why are automobile insurance prices skewed against low-income drivers? Today underwriters are trying to figure out who is less likely to make a claim on their policies and this can be different than who suffers the most vehicular damages and losses. Apparently, many people choose not to make a claim even though they suffered losses. It is not surprising that they like policyholders who are unlikely to make a claim, regardless of them being good drivers or not.
Making small claims or not is probably the most noticeable difference between the habits of rich and poor policyholders. When the money is tight, motorists would tend to claim even if they would get a small compensation after the deductible. On the other hand, better off motorists wouldn’t want to waste time filling forms and dealing with adjusters when they can pay the damages out of pocket. This perhaps explains why car insurers prefer financially well-off policyholders and charge more for financially struggling ones.
One of the reasons why most states allow credit scoring to be included in vehicle insurance premium calculations is the fact that a relation between the score and claims is proven. In other words, you are statistically less likely to bother insurers with minor incidents if you have comfortable income and solid financial background, which is reflected on credit reports. On the contrary, having no spare savings in the bank may leave no choice but to submit a claim. This could be the point underwriters are picking on.
How Does Income Affect Auto Insurance Premiums?
Obviously, insurers cannot brand policyholders as poor and rich and probably they have no way of doing that. However, there are indicators showing who has money and who is struggling as listed below;
Credit Score: It is one of the clearest indications of financial success. People with money have much better and longer financial history with bank accounts, credit cards and approved mortgages. On the other hand, missed payments, maxed up cards, refused loan applications are clear indications of someone who is having money problems and therefore such a person would have a low score.
Credit score is one of the key indicators used to determine premiums. You can get as much as 52% lower rates by having an excellent credit score alone with some insurers, in comparison to what you would be charged for automobile insurance with bad credit.
Home Ownership: Most proposal forms ask if you own or rent because it is one of the factors reflected on quotes. It is no secret that homeowners get cheaper vehicle insurance than renters since it is taken as a good sign that you are on your way to building wealth, taking on more responsibilities and starting a family. These are all positive indicators since most companies prefer responsible people.
Zip Code: Wealthy and poor neighborhoods are commonly used terms to describe parts of towns and cities. Statistically, the latter are more likely to have higher claims and therefore aren’t favored. It is in human nature that people with money would want to raise their families in wealthy neighborhoods. So, how rich you are is usually hidden in your zip code and that does affect automobile insurance premiums.
Education and Profession are two other areas that show your income level. You are more likely to get a white collar job after graduating from a decent college or university and they are more likely to pay better. GEICO is the leading insurer offering discounts to large numbers of professional associations and there are companies offering more affordable car insurance for college graduates.
The above factors are commonly used in the calculations and here to stay. If you are in a lower income bracket and applying to one of those companies placing higher weight on credit score, zip code, home ownership and profession you are unlikely to get favorable vehicle insurance rates due to not scoring well on those areas. Probably most of them will use these indicators one way or another but the degree of its effects on your auto insurance rates can be substantially different, as discussed above.
Which insurer you get a quote from affects costs more than you can imagine. Good thing most policies are only for six months and you can switch whenever you want. If you don’t compare auto insurance companies for prices and quality, you cannot blame them for getting away with charging you more.