Traditionally, driving records were the main force behind low automobile insurance quotes. Lately underwriters are using so many new factors to calculate premiums. Some of these metrics like credit history, education, profession and zip code is not favoring middle to low-income families. On the other hand, they may help higher income group get better rates for reasons that have nothing to do with driving but a lot to do with money.
Is Auto Insurance for Poor People More Expensive?
This theory was tested in a study carried out by the Consumer Federation of America (CFA). The assumption was that the driving records would still be the key factor in getting low rates. The study checked prices in fifteen cities. They searched quotes for basic liability coverage for low-middle income applicants with good records.
The results were surprising in many ways. 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 they are charged over $1,000 for a basic coverage even though they had clean history. These figures are well over average vehicle insurance costs in most states. 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.
Is Car Insurance for Rich People Cheaper?
According to the same study, the better off drivers got on average twenty five percent better rates than the applicants with similar particulars but from poorer backgrounds. For example, a married male driver with good education and own a home in privileged part of the town would get much cheaper 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. The good news is that not all of them are keen on offering lower prices for rich people. For example, State Farm, one of the top carriers in the study, 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.
Often people are told that cheaper quotes come from less established companies and the coverage may not be as good. This study shows that such claims are totally baseless. Looking at above figures, financially less fortunate motorists would have to pay 80% more for insisting to be insured by GEICO, instead of State Farm. If you are one of those you probably deserve what you get. However, it is probably safe to assume that motorists are done because of lack of knowledge and awareness that premiums can fluctuate as much as 80% between similarly reliable and strong companies.
Why are the figures screwed against low-income drivers? The answer to this question lies on statistical claim figures. 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.
There is a serious misconception that can cost a lot of money to both carriers and policyholder. Often they are under the impression that small claims won’t really affect renewals since they are negligible sums. It is true that they are paid pretty fast and with a little fuss. It doesn’t mean that they don’t count. When you total them up and add the administration costs they can be so large that they can surpass the settlements for large claims.
Making small claims or not is probably the most noticeable difference between the habits of rich and poor policyholders. It is understandable that you would ask for compensation even though you may receive only few hundred bucks because it is still a lot of money in your current circumstances. On the other hand, you wouldn’t want to waste time with filling forms and dealing with adjusters when you have plenty money in the pocket to pay for it and be done with it. Seeing it like this perhaps explains why car insurers prefer financially well-off policyholders and try to price out 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 carriers 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. This could be the point underwriters are picking on.
How Does Income Affect Auto Insurance Premiums?
Obviously, they cannot brand policyholders as poor and rich and probably they have no way of doing that. However, there are ways that show who has the money and who is struggling and these are discussed below.
Credit Score: It is one of the clearest indications of 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 indication of someone who is having money problems and therefore such person would have low a score.
It is one of the key indicators that are used to determine premiums. You can save as much as 25% by having good credit score alone with some, in comparison with 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 vehicle insurance is cheaper than for renters since it is taken as a good sign that you are on your way to building wealth, taking 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 the 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 color job after graduating from a decent college or university and they are more likely to pay better. GEICO is the main one that offers discounts to large numbers of professional associations and there are some that offer more affordable car insurance for college graduates.
Why Do the Poor Pay Higher Premiums than the Rich?
The high emphasize on credit score, education, home ownership and location are thought to be the main reasons for the premium gap opening up between people with identical driving history but different socioeconomic background.
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 that place higher weight on the score, zip code, home ownership and profession you are likely to get penalized for who you are or 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 rates can be substantially different, as discussed above.
Choice of carrier affects rates 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.
This point cannot be stressed any further. The above evidences are clear that each has different criteria and that results in serious fluctuations in quotes. The more people search for better rates and switch the quicker the price gap will close up, as the market will wake up to the fact that consumers aren’t forgiving any longer. This is something you should remember at each renewal.