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Does Income Affect Car Insurance Rate?

Fran
David Joy February 4, 2020

Driving is a privilege, not an entitlement. While the federal government is willing to pay for certain entitlements, it has not yet come around to paying for privileges. Alas, "car-insurance welfare" is not a thing. Enter auto insurance companies.

In the business of mitigating uncertainty, auto insurance companies are for-profit enterprises whose bottom line is necessarily vulnerable to unpredictable market forces. In order to cover their insurance claims and operating expenses for the year but still make a profit, insurance companies plow through mounds and mounds of raw data and statistics to calculate risk. In short, the higher the uncertainty, the higher the car insurance rate.

Studies and statistics have long suggested that an individual's income level is a predictor of outcomes for an insurer, just like a low insurance score is a predictor of claims. While there are many reasons for this generalization, there's no need to worry: You can find auto insurance that fits your budget.

Your Income, Statistics and Car Insurance Rates

Does income affect your insurance rate? When gathering information to understand your risk profile, an auto insurance company will look at a wide range of factors: your age, gender, marital status, zip code, credit rating, driving history, insurance history, average annual mileage, and the make and model of your car, among others. This overall risk profile is called your "insurance score."

Your insurance score—or the overall likelihood of negative outcomes based on statistics—determines your auto insurance premium, or the total amount you must pay for your auto insurance over a 12-month period. As the Insurance Information Institute notes, "The reason for such widespread adoption of insurance scores for underwriting and rating is that most studies have found a strong relationship between insurance scores and losses."

Of course, your insurance score is greatly affected by your credit rating, which is a reflection of your payment history, credit history, debt, credit mix and credit accounts. According to the merciless law of averages, it is rare for a person with a low income to have an excellent credit score. In other words, if your creditworthiness is poor, your coverage rate will be higher than average.

However, if you are working on building your credit, it is important to keep in mind that most auto insurance carriers only go back five years when researching a potential customer's credit record.

Statistics Dictate Car Insurance Rates

Insurance companies use statistics to isolate high-risk factors. To an insurance company, A person with a poor credit history is a high risk.

The Consumer Federation of America recently reported the results of an in-house study on the relationship between a clean driving history, credit scores and car insurance rates. Using the state of Colorado as a test-case scenario, here's what the study found:

  • Coloradans with a spotless driving history pay 33% more, on average, for an insurance policy if they have a "fair" credit score rather than an "excellent" credit score, all else being equal.

  • Coloradans with a spotless driving history pay 72% more, on average, for insurance if they have a "poor" credit score rather than an "excellent" credit score, all else being equal. For minimum liability coverage, that is a $427 average annual credit penalty for drivers with perfect records.

As unfair as it may seem, even if you're a good driver and make a modest income, you're probably paying more, sometimes much more, for car insurance. But there are a plethora of factors that affect insurance quotes and premiums, such as homeownership, education level, zip code and other socio-economic factors.

Discounts Lower Insurance Rates

If you are looking to find the best, cheapest auto insurance or you want to pay less than you already do, you can save money by taking advantage of insurance companies' discounts. For instance, almost all car insurance carriers offer a lower premium to drivers with zero accidents as well as to drivers who are a member of the military. In the auto insurance industry, insurers commonly offer the following price breaks:

Discounts for Education

  • If you get good grades in school
  • If you are away at college and hardly ever use the family car
  • If you are a teacher
  • If you pass a defensive driver course
  • If you are a member of certain alumni associations

Discounts for Multi-policies

  • If you have more than one policy with the same company (home-auto)
  • If you have more than one vehicle on the same auto insurance policy  

Discounts for Your Vehicle

  • If your vehicle has safety features (anti-lock brakes, air bags)
  • If your vehicle is less than three years old
  • If your vehicle has anti-theft devices (GPS-based systems, VIN etching)

Discounts for Method of Payment

  • If you pay your annual premium all at once
  • If your monthly premium payment is made by automatic withdrawal
  • If you pay online

These insurance discounts can add up to a nice pile of ducats over time. So, as you shop around for insurance quotes to compare auto insurance companies, types of coverage and price, don't forget to ask about these excellent ways to save.

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Are Auto Insurance Rates Unfair?

Some say yes, some say no. Needless to say, this debate is now a hot topic in the U.S. While car insurance companies do not use income, race or ethnicity to calculate insurance scores, some critics have noted that the use of this all-powerful metric seems to end up charging unfairly higher rates for certain demographically and economically disadvantaged groups.

While the Insurance Information Institute says "most analyses dispute these claims," noting that the Federal Trade Commission itself has "concluded that credit scores cannot easily be used as a proxy for race and ethnic origin," the claim of rampant insurance-related discrimination continues in many quarters.

The Backlash Against the Income Factor

Even if we say that statistics never lie, could we say that statistics are never manipulated? Could we say that statistics give a poor overall picture of a particular driver to insurers? Pressure is mounting on the insurance industry to account for what many consider to be glaring discrepancies between the rich and the poor.

  • "Minority Neighborhoods Pay Higher Car Insurance Premiums Than White Areas with the Same Risk," blares the April 5, 2017, headline of a joint report by ProPublica and Consumer Reports.

  • "[Education] and occupation serve as surrogates for income," Robert Hunter, the Consumer Federation of America's director of insurance, told The New York Times. In fact, the Consumer Federation of America points out that a blue-collar worker with a good driving record pays 59% more a year than a white-collar worker with the same driving record.

  • In 2019, Rep. Rashida Tlaib (D-Mich.), Rep. Alexandria Ocasio-Cortez (D-N.Y.) and other lawmakers proffered legislation that would stop the auto insurance industry from using consumer-credit data to determine auto insurance rates.

This list of studies, statistics and proposed legislation could go on and on. But perhaps the fundamental question is, why should two drivers with clean driving records be charged two different rates by the same company? Despite all the other factors, aren't these two drivers with unblemished records both a great wager for not getting into any accidents? In fact, even the Insurance Information Institute admits, "The reason for the predictive power of insurance scores is up for debate"!

"Redlining" Is Illegal

When it comes to auto insurance, "redlining" occurs when insurers charge higher premiums or flat out refuse to offer insurance coverage in certain neighborhoods, which, critics note, are often communities of color.

Enacted in 1974, the Equal Credit Opportunity Act "prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act," avers the Federal Trade Commission. "The Act also requires creditors to provide applicants, upon request, with the reasons underlying decisions to deny credit." 

While a failure to comply can subject an insurance company to civil liability for actual and punitive damages in individual or class actions, such cases are notoriously hard to prove given the many factors that affect auto insurance premiums. However, ascertaining "the reasons underlying [the decision] to deny credit" might be a great place to start.

States That Frown on the Use of Credit Ratings

California, Hawaii, Massachusetts, Michigan and New Jersey don't allow insurance companies to use your credit rating against you when they determine how much you'll pay for insurance.

Maryland, Oregon and Utah limit the use of credit ratings when calculating auto coverage. In these states, it is very unlikely that insurers will charge higher rates for money-related factors.

So, if you live in these states and have poor credit, you're in luck!

How Much Does a Car Really Cost?

It's important to remember that your income is not your budget. Owning a car is a big financial commitment that involves a lot of costs: monthly car payments, monthly auto-insurance payments and the bills for gas, general maintenance and repairs. So, how much does a car cost overall?

Over a five-year period, the total cost for a four-door 2015 Ford Explorer SUV with 15,000 miles is $40,983, according to online automotive resource Edmunds.com. Besides the sticker price, this is how that figure breaks down:

Expense Five Year Cost
Depreciation of vehicle's value$11,107
Fuel$10,034
Maintenance$7,349
Insurance$4,417
Vehicle financing$3,476
Repairs$2,870
Taxes and fees$1,730

By comparison, the total five-year cost for a four-door 2020 Mitsubishi Mirage G-4 Sedan is only $29,185.

Rather than dealing with any insurance companies, many lower-income people choose to move to the big city, use public transportation and forget all about minimum auto coverage, full coverage and all other add-on coverage. Public transportation isn't free, but it costs a lot less money than owning a car.

What Are Some Factors that Count Against Lower-Income Drivers?

EDUCATION LEVEL

An insurance company may give better price breaks the more degrees a person has. Often, this works against lower-income drivers, who don't always have college and post-graduate degrees.

LOCATION OF RESIDENCE

If you live in a high-crime, high-theft area, your insurer will no doubt charge you more money for living in a high-claim location. Usually, people who live in these neighborhoods face money challenges, regardless of their gender, age or being a zero-claim driver.

Cities with the Highest Insurance Rates for Low-Income Individuals

Find Car Insurance for Low-Income Drivers

Tips for Lower-Income Drivers

Shop car insurance rates before you buy, preferably with a company that compares policies side by side. One insurer may literally charge you thousands of dollars more than another carrier. 

Make sure to compare apples to apples when buying insurance. Don't compare prices on different packages or different tiers of coverage.

Be wary of getting transferred over to an affiliate that specializes in high-risk insurance. If you sign on you'll be paying much more than you should if you have a clean record. 

Ask insurers about discounts and try to tack on as many as you can. 

Lower-Income Car Insurance Programs

If you're thinking all car insurance companies are out to get you, here's some good news. A handful of states have programs to help low-income families with cheap full-coverage car insurance. If you live in one of the following states, you may benefit from a low-income car insurance program.

CALIFORNIA

If you're a low-income resident of California, you may qualify to participate in the  Low Cost Auto Insurance Program, or CLCA. To be eligible you must have a car worth less than $25,000 and be at least 16 years old.

HAWAII

If you're a low-income Hawaii resident, you may be qualified for Assistance to the Aged, Blind and Disabled Program, or AABD. To qualify, you must be 65 years old or older, legally blind or permanently disable and able to show that your income is 34% of the current Federal Poverty Level. You must have less than $2,000 of assets for an individual and $3,000 for a couple. 

MARYLAND

Low-income drivers in Maryland can apply for The Maryland Auto Insurance Fund, or MAIF. This program is open to anyone who has been turned down by traditional insurance companies. The policy would provide up to $30,000 per person for bodily injury and $15,000 for property damage -- not the highest limits but enough to satisfy state minimums.

NEW JERSEY

The low-income car insurance program in New Jersey is called The Special Automobile Insurance Policy, or SAIP. To be eligible you must be enrolled in federal Medicaid with hospitalization. If you qualify, insurance will only cost $360 ($5 extra if you have to make monthly payments). The policy covers one car per policy.

How To Improve Your Credit Score

The best way to start is to get a free copy of your credit report and score to find out then focus on what is bringing your score down and work toward improving these areas. Here are some common steps you can take to increase your credit score.

  • Always pay all your bills on time.
  • Pay down your existing debt as soon as possible.
  • Make any outstanding payments.
  • Dispute inaccurate information on your report.
  • Avoid taking on any new lines of credit.

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