When Lindsay VanSomeren and her husband moved from Tacoma, Washington, to a bit north to Kirkland, something surprising happened to their car insurance premiums.
Besides moving to a more affluent area, nothing that could have affected the cost of their insurance changed. The VanSomerens had perfect driving records, and opted for the same full coverage — comprehensive, collision, underinsured motorist coverage, and higher-than-average property damage coverage.
Yet after uprooting from a gritty, industrial, low-income area to a more affluent neighborhood with a booming tech scene, their semi-annual premium dropped from nearly $600 to $500.
“I was pretty surprised that our car insurance went down by so much,” says VanSomeren. “Still, everything else in our new location is more expensive (like our rent — that went up by $700 per month for a comparable apartment), so I don’t know if I’d necessarily recommend moving to a higher cost-of-living area as a budget-friendly move! But I’m happy that at least our car insurance went down, not up.”
Of course moving from one ZIP code to another will usually have an impact on car insurance rates.
But why did the rate occur, and what does it say about how insurance companies treat statistically low-income neighborhoods versus more wealthy areas?
Once you take a closer look, the line between insurance rating factors and income discrimination starts to get very blurred.
Higher auto insurance premiums connected to location
Can living in a low-income or predominately minority neighborhood be linked to a higher car insurance premium? Even if you have a clean record with no speeding tickets or accident history?
According to a recent study by the Consumer Federation of America (CFA), it can. The study revealed there were significant differences in premiums for those who lived in different ZIP codes. This is the case, even among neighbors who lived within 100 yards of each other.
Even though the drivers had identical driving records, the ones who lived in a ZIP code with a higher median income paid less for their car insurance than those in lower-income areas.
While insurers claim that the reasoning for the higher premiums in these neighborhoods is because the risk is greater in those areas, a recent analysis by Consumer Reports and ProPublica, a nonprofit newsroom, points otherwise.
Insurance companies also use ZIP code to look at the number of claims made in that area, the road conditions, and population size to determine the rate.
However, the Consumer Reports/ProPublica analysis sought to account for the variation in these factors between different areas.
Analyzing local risk data and auto premiums in four states — California, Illinois, Texas, and Missouri — the study found that in areas with similar risk profiles, the premiums charged to customers in low-income, minority neighborhoods were higher than equivalent high-income areas.
Some insurers were charging as much as 30 percent more in minority neighborhoods than in white neighborhoods.
Redlining is illegal
Redlining is the discriminatory practice of denying insurance or changing the terms that have nothing to do with how risky it is to insure a driver. It usually happens in low-income neighborhoods with large concentrations of ethnic minorities.
This practice has been outlawed, and insurance companies have to demonstrate the actuarial ground for how they set rates. Despite these safeguards, critics claim it exists in a more subtle, indirect form.
There are two key factors that influence car insurance rates that penalize low income drivers.
1. Credit score
Your credit-based insurance score predicts how likely you will file a claim, and how much the payout might be.
If a lower-income individual has made poor financial decisions that have negatively impacted their credit rating, then that credit rating will negatively influence their insurance premium amount, explains Jenny Saint Preux, a personal insurance agent based in Atlanta, Georgia.
Their premium will be higher than for someone with the exact same demographics but a better credit rating.
According to data from The Zebra, someone with a poor credit score could pay a $2,411 premium whereas someone with an excellent credit score would only pay $1,130.
“It’s entirely legal for credit rating to influence the premium, as credit can be a great indicator as to the level of responsibility that a person may show in their day to day lives as a vehicle operator,” says Saint Preux. “Essentially, the client is being surcharged for their poor credit due to the higher probability of a potential loss.”
There are flaws in this system and it doesn’t paint a complete picture of a customer.
Using credit rating for to calculate a rate tends to single out people whose credit scores may have taken a hit due to financial hardship or other circumstances beyond their control. It’s a system that penalizes low income drivers.
It’s a controversial practice that’s even been outlawed in some states, such as California.
Urban drivers might pay a higher premium than drivers in rural areas. That’s due to higher rates of vandalism, theft, and accidents.
And where you park, such as on the street or a secured garage, can also affect the cost of your insurance.
Unfortunately, auto insurance rates are based on a number of different factors that aren’t related to driving habits. It’s a practice that continues on in insurance companies.
Giving out higher car insurance rates based on credit score or location isn’t random. Insurance is a heavily regulated industry. Insurance companies have to prove that there’s actuarial justification for using these factors for rates and the regulators sign off on it.
States with programs for low-income individuals
If you have trouble affording auto insurance, don’t run the risk of being uninsured. Driving without insurance has consequences.
It varies from state to state, but you could pay a hefty fine or have your license suspended. Even worse, if you’re in an accident while uninsured, you will have to pay for damages and medical expenses out of pocket.
Depending on where you live, help exists. You don’t need to drive uninsured.
Some states have specific programs to help you get affordable car insurance:
The Golden State has the California Low-Cost Auto Insurance (CLCA) program. California drivers who meet the eligibility requirements might qualify for state-sponsored insurance that’s more affordable than most private insurance plans.
This program provides you with the minimum liability insurance need to legally drive. It also comes with two optional coverages: uninsured motorist bodily injury protection and medical payments coverage.
But if you get insurance through the state program, your policy won’t cover any damage to your own car.
The cost of insurance depends in part on where you live.
You’ll need to fill out a questionnaire, and meet the income eligibility requirements. If there’s one person in your household, you can’t make more than $31,225 a year. For a two-person household, your annual earnings can’t exceed $42,275. For a three-person household, you can’t make more than $53,325 combined, and no higher than $64,375 for four.
To qualify, you’ll also need to own a vehicle that’s valued at $25,000 or less, and be at least 16 years old.
Through its Aid to Aged, Blind, and Disabled (AABD) program, the Rainbow State extends free no-fault auto insurance to residents who get assistance. To be eligible, one must be 65 or older, be blind, permanently disabled or have a medical condition that prevents you from working.
Plus, you don’t qualify for federal benefits. Your income must be below 34 percent of the federal poverty level. If you’re single, you can’t have more than $1,000 in resources, or $2,000 if you’re a couple.
Through the Garden State’s Special Automobile Insurance Policy (SAIP), some drivers might be eligible for a medical-only coverage policy for $360 a year if you pay up front or $365 if you pay in two installments. If you qualify for federal Medicaid with hospitalization, you could receive this discounted auto policy.
SAIP will cover emergency treatment right after an accident. It will also cover treatment of serious brain and spinal cord injuries. Coverage is up to $25,000. There’s also a death benefit of up to $10,000.
SAIP does not come with any liability, collision, and comprehensive coverage. You will not be covered for any damage that you cause to someone’s property or damages to your own car.
To be eligible, you need to have a good driving record, and be enrolled in Medicaid.
How to lower your premiums
If you live in a lower-income area and find yourself paying more for auto insurance, there are ways you can reduce your monthly premiums.
1. Shop around
Get quotes from several insurers and do a cost-by-cost comparison.
To get the best price, you’ll want to shop around when you’re moving, before buying a new car, or when adding a new vehicle to your existing policy.
It can be a lot of work to seek out quotes from different insurers, so Cover is here to do the heavy lifting for you. We’ll search over 30 insurance companies to get you the best rate.
2. Consider a higher deductible
A higher deductible means paying less each month. The trade-off is that you’ll be paying more out of pocket before insurance kicks in.
If you choose to go with the higher deductible, set aside enough money in an emergency fund. That way you’ll be able to pay the deductible if you need to file a claim.
3. Reduce coverage on an older car
If you have full coverage on an older car, you might not need collision and comprehensive insurance. As your car gets older and depreciates over time, you might not need such extensive coverage.
4. Remove lease insurance after your car is paid off
If you financed your car and got lease or loan insurance, once you’ve paid off the loan, you’ll no longer need the insurance.
It’s easy to forget, but be sure to reach out to your insurance company and take this off your policy. It’ll slightly bump down your rate.
5. Check for discounts
You might be surprised at what grants you a discount on your premium. Everything from opting for auto pay, or paying annually or semi-annually instead of monthly can save you some money.
You might also get a slightly reduced rate for green vehicles, or if you have an anti-theft device on your car. Other discounts you could be eligible for are if you’re a student with good grades, are a good driver, a senior, or homeowner. Ironically, you might also be able to snag a discount if you have low income.
Insurance companies might give you a discount if you insure multiple cars for your household. Bundling your auto insurance policy with, say, your homeowners or renters insurance can also save you money.
It doesn’t hurt to reach out the the insurer and inquire about discounts you might be eligible for. When in doubt, certainly ask.