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Why Is Car Insurance So Expensive?

Car insurance gets more expensive every year due to the economy's inflation rate. However, your car insurance rate may be high due to many factors that an insurer will weigh. If you feel your auto insurance is too high, there are ways to minimize the cost. For one thing, you could elect to pay a higher deductible, which will lower your premium. You can also lower your premium if you qualify for a few of your auto insurer's offered discounts. There's always the option to save hundreds of dollars a year for "bundling" home and auto insurance. Comparison shopping often has the reward of a better rate too. Here's more on why your car insurance may be expensive and what you can do to change that.

Factors That Can Make Car Insurance Expensive

When calculating an individual's auto insurance rate, insurers look at many factors in an effort to predict that individual's likelihood of having an accident or filing a claim:

State RequirementsGender
Geographic LocationCoverage History
Garaging AddressClaims History
Vehicle TypeVehicle History
Safety Features DiscountMileage
Driving RecordMarital Status
Credit ScoreCoverage Amount
Experience and AgeDeductible

State Requirements

One factor that impacts the cost of car insurance is the state's mandated minimum auto insurance requirements. Most states demand their drivers have liability auto insurance, which protects the policyholder against bodily injury liability and property damage liability claims that result from an accident the policyholder caused. 

Other states require not only liability insurance but also uninsured motorist coverage, which pays for your medical bills and property replacement when the at-fault driver has no insurance, as well as personal injury protection (PIP) or medical payments coverage, which pays for your medical care no matter who caused the accident. 

Let's look at two examples, Alabama and Maine:

Alabama's Mandated Minimum Auto Insurance

  • $25,000 bodily injury liability per person

  • $50,000 bodily injury liability per accident

  • $25,000 property damage liability per accident

Maine's Mandated Minimum Auto Insurance

  • $50,000 bodily injury liability per person

  • $100,000 bodily injury liability per accident

  • $25,000 property damage liability per accident

  • $50,000 uninsured/underinsured motorist coverage per person

  • $100,000 uninsured/underinsured motorist coverage per accident

  • $2,000 medical payments coverage

The state average for Alabama's minimum insurance package is $75 per month, whereas the state average for Maine's minimum insurance package is $70 per month. (Pro tip: When you get an auto insurance quote, that quote typically reflects the cost of your state's mandated minimum auto insurance, either for six-months or 12-months of coverage. However, it's good to ask your licensed auto insurance agent what coverages and time period a quote includes. For example, some quotes may automatically include full coverage, which is not mandated by any state.)  

While your state's mandated minimum coverage is non-negotiable, the price you pay for that mandated minimum coverage is very negotiable in the open market. In fact, most people are probably overpaying for their auto insurance. The only way to find out is to shop around for auto insurance quotes, comparing the prices of identical insurance packages from different insurers.

Geographic Location

Since urban areas file more insurance claims than rural areas, urban drivers typically pay more for their auto insurance due to a larger, denser population, a higher number of cars on the road and higher rates of auto theft, vandalism and insurance fraud

If you move to a new neighborhood or a new state, your insurance rate will most likely change based on the costs and risks that an auto insurer correlates with your new geographical location. Below, this point is illustrated in two ways: from state to state, according to 2018 figures from the Insurance Information Institute, and from city to city, in Louisiana:

MOST EXPENSIVE STATES in the U.S.

Rank State Avg. Cost of Auto Insurance Per Year
1Louisiana$1,545.82
2Michigan$1,469.73
3District of Columbia$1,429.43
4Florida$1,426.46
5New York$1,425.00

LEAST EXPENSIVE STATES in the U.S.

Rank State Avg. Cost of Auto Insurance Per Year
1North Dakota$686.08
2
Maine$686.25
3
Iowa$700.71
4
South Dakota$721.67
5
Idaho$722.06

MOST EXPENSIVE CITIES in Louisiana

Rank City Avg. Cost of Auto Insurance Per Month
1Violet$240.58
2Harvey$239.02
3Chalmette$235.10
4Gretna$228.71
5Marrero$227.55

LEAST EXPENSIVE CITIES in Louisiana

Rank City Avg. Cost of Auto Insurance Per Month
1Mansfield$115.51
2Ferriday$117.76
3Leesville$123.87
4Keithville$128.53
5Ruston$129.13

Garaging Address

A vehicle parked in a garage is less vulnerable to perils than a vehicle parked on the street. As you can see, geographical location matters here, too. One reason your insurance rate may seem expensive is because you park your car on the street at night in a high-crime area. If you decide to pay for your car to be garaged, you should immediately notify your insurance agent.

Vehicle Type

Whether a brand-new SUV, a 10-year-old used vehicle or a classic car, the type of vehicle you insure makes an impact on your auto insurance rate. Some cars are safer than others. Some are more expensive to fix or replace. Compare the differences in rates per car:

Vehicle Average Annual Cost of Insurance
2021 Toyota Corolla$1,181.93
2021 Volvo Xc60$1,008.00
2021 Mercedes-Benz E$1,680.00

Safety Features Discount

Most car insurance companies give discounts on policies when the insured car has safety features (air bags, anti-lock brakes, daytime running lights) and anti-theft features (audible alarms, hidden kill switches, GPS trackers). Backup cameras and lane assist may award you discounts but could raise your premiums because they are expensive to replace.

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Driving Record

Every auto insurance company takes a long, hard look at an applicant's driving record, which is typically maintained by the state's DMV under a points system. Auto insurers usually only look at the last three to five years of your driving record, which is about how long points take to expire in many states. Other states remove a certain amount of points when a driver avoids getting any moving or criminal violations over a 12-month period.

If you take a driver's education course, some states will take points off your driving record and some auto insurers will lower your auto insurance rate. When you've maintained a certain number of years of spotless driving, you may be eligible for a "safe driver" or "good driver" discount on your auto insurance. 

Credit Score

California, Hawaii, Massachusetts, Michigan and New Jersey forbid auto insurance companies from using credit scores to determine auto insurance rates. In the other states, auto insurers will check an applicant's credit history to determine their "insurance risk score," speculating that "people who manage their money well tend to take better care of their homes and to drive more responsibly," according to the International Risk Management Institute

When an insurer checks your credit with the Equifax, Experian and/or TransUnion credit bureaus, the insurer is interested in your payment history, account balance, credit limits, loan amounts, number of active accounts and bankruptcy filings, among other facts.

An insurer may request reports from all three major credit bureaus, since the reports are not identical. You should regularly check your credit reports to make sure the information is correct and that no errors are unnecessarily hurting your credit score. Paying your bills on time and paying off outstanding debt is the quickest way to improve your credit score.

Experience and Age

Driving inexperience coupled with youth is a big red flag for risky driving behaviors, which is why America's youngest drivers pay the most for car insurance. For example, while North Carolina's average per-month auto insurance rate is a mere $61, the same amount of coverage costs more than $150 for a 17-year-old and about $90 for a 19-year-old.

Having a young, inexperienced driver on your auto insurance policy will make your insurance rate increase dramatically.

Most drivers in their late 20s or early 30s start to see their insurance rate get much closer to their state's average. The good news is that a teen can remain on a parent's insurance policy as long as the teen lives at home and drives the policyholder's car. 

As the policyholder, a parent may be eligible for a discount on their insurance if their kid takes a driver's education course, gets good grades or is away at college and only uses the car during breaks. When you are thinking of adding a driver to your policy, it's a great time to comparison-shop for a cheaper rate.

Gender

Gender is sometimes factored into a car insurance rate. Since men statistically have more accidents, more severe accidents and more DUI-related accidents than women, men typically pay more than women for auto insurance. However, when both genders reach their late 20s or early 30s, they end up paying about the same amount for the same amount of auto insurance, all things being equal. 

Coverage History

Auto insurers consider uninsured drivers and drivers who let their insurance lapse to be high-risk drivers, and high-risk drivers always pay a higher-than-average premium. For example, a first-time DUI conviction can nearly double your premium.

A DUI conviction will nearly double your current auto insurance rate.

Claims History

The more claims you file, the more your insurance rate will increase. So, you must be selective about the claims you file. For example, if a dent in your car costs $300 to fix but you have a $500 deductible on your collision insurance, you should pay for that fix out of pocket and not file a claim. (Pro tip: You have to pay the agreed-upon deductible every time you make a collision or comprehensive claim.)

Vehicle History

Auto insurers use a vehicle identification number (VIN) to trace a vehicle's history. For example, you will pay a higher premium for a salvage title, which denotes a vehicle that has been declared a total loss. In fact, some insurers may refuse to indemnify a salvage title. 

Customers looking to buy a pre-owned car can find out its history using AutoCheck or CarFax, for example, to trace the vehicle's VIN.

Mileage

The fewer miles you drive, the less likely you are to be involved in an accident. If your commute has shortened, you've started to work from home or you've retired, you may be overpaying for your auto insurance. Talk to your insurance agent about possible ways to save based on mileage. For example, Nationwide's SmartMiles program specifically benefits low-mileage drivers. State Farm offers a discount for drivers who drive no more than 7,500 miles a year.

If you have retired, you can probably save on your auto insurance because you are no longer commuting to work.

Marital Status

Most auto insurers wager that married people are more likely to exhibit safe driving habits than single people, thus your rate will drop if you get hitched. Taking Iowa as an example, the chart below indicates typical premium disparities based on marital status:

Marital Status Avg. Monthly Rate
Single$57.75
Married$60.34

While it seems as if a married couple were paying more than a driver who is single, the married couples' premium is covering two drivers, not just one, for just $2.59 more.

Coverage Amount

The more coverage you buy, the more expensive your auto coverage will be. If you want to get the cheapest insurance, purchase only your state's mandated minimum amount of insurance. If you increase your liability coverage limits above minimum limits or you purchase full coverage, gap or another add-on insurance product, those extras will increase your premiums.

A Higher Deductible=A Lower Premium

A deductible is the agreed-upon amount you must pay before your auto insurer will cover a loss. For example, if you chose a $500 deductible on a covered loss that caused $1,000 worth of damage to your car, you would have to pay $500 out of pocket before your insurer will pony up the remaining $500. 

If your auto insurance premium is too high, you can lower it by choosing a higher deductible. Deductibles apply to collision and comprehensive insurance and sometimes to PIP and uninsured/underinsured motorist coverage for property damage. Note: You must pay a deductible every single time you file a claim for a covered loss.

State with the Most Expensive Car Insurance: California, Florida, Michigan and New York

Some states have higher average auto insurance rates than other states due to a combination of variables, including a state's total number of claims, the cost of those claims, the frequency of natural disasters, number of auto thefts and amount of auto insurance fraud, among others. 

One reason for the high cost of insurance is the large population of urban dwellers in California, Florida, Michigan and New York. In fact, 95% of California residents, 91.2% of Florida residents, 87.9% of New York residents and 74.6% of Michigan residents live in urban areas, as defined by Iowa State University. These states are also among the top-10 most heavily populated states in the U.S: The more drivers on the road, the greater the likelihood of accidents and the more costs auto insurers have to cover.

How To Pay Less for Car Insurance

One great way to lower your auto insurance rate is to take advantage of an insurer's discounts. You can get discounts for taking a defensive driver course, getting good grades, remaining a safe driver, paying your premium in full, and being a veteran, teacher or firefighter. Most carriers cap the amount of discounts you can receive, but you still may be able to shave, say, 20% off your premium.

Here are some other ways to lower your rate:

  • Get a new car with safety and anti-theft features

  • Reduce your daily commute or drive fewer miles

  • Become a homeowner

  • Bundle your auto coverage with other policies

  • Follow traffic laws and avoid getting tickets

  • Improve your credit score

  • Pay half or all your premium in advance

  • Sign up for paperless or autopay payment

  • Choose a higher deductible

  • Compare car insurance rates

Are You Overpaying for Your Auto Insurance?

Your car insurance rate may lower when you get married, move to a new zip code, buy a brand-new vehicle, start garaging your car, maintain a clean driving record, improve your credit score or gain more experience behind the wheel. To secure a low insurance rate, drivers should file as few claims as possible and never let their auto insurance lapse. Of course, how much insurance you buy affects the overall cost, and you can always lower that cost by increasing your deductible or applying for discounts.

SmartFinancial can also lower your car insurance rate by comparison-shopping quotes. Sorting through all the auto insurance policies in your area, SmartFinancial will match you with the carrier offering a policy that fits your needs and budget.  For free, real-time auto insurance quotes, just enter your zip code below or call 855-214-2291 for a one-on-one consultation.

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