Do Poor People Really Pay More For Car Insurance?

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A Consumer Federation of America (CFA) report released at the end of January 2012, claims that poor drivers pay more for car insurance than middle class and wealthy drivers. The report goes on to point out that this can have a large, negative impact on those who rely on their cars to get to (or find) work. Moreover, the difference is not always jut a few bucks:

“In some areas, many responsible lower-income drivers are required to spend more than $1000 a year for liability coverage that is often unfairly priced and provides no real insurance protection to them,” claims CFA Executive Director Stephen Brobeck.

The study classified people as low-income if they earned less than $19,000 a year. Therefore, taking the numbers above at face value, someone with an income of $19,000 a year and who pays $1,000 a year for car insurance, would be paying over 5% of their total income just to insure their vehicle. For those on the edge of poverty this could be the final straw.

Is it Legal?

You may well be wondering if charging poorer consumers more for insurance is legal. The simple answer is that it is illegal to charge more for car insurance just because someone earns less. Insurers are not allowed to ask you how much you make. However, insurance companies do look at many factors that can be viewed as proxies for wealth and income. The most important are the following:

Where You Live:

Where you live is one of the biggest factors determining your car insurance rates. Generally, only the wealthy can afford to live in places like Beverly Hills. Insurers look at risk factors associated with where you live to determine rates. If car accidents and thefts happen less often in Beverly Hills compared to say Compton, then those living in the latter will be charged more. Thus, someone who is poor living in a rich neighbourhood will most likely get a better rate, than someone rich living in a poor area.

What You Do:

Your job also has an impact on what your insurer may charge you. Insurance companies have found that certain people in certain professions tend to get in more accidents and make more claims than others. Again, income is not the overriding factor here, but you can be fairly certain that a banker is going to be making far more than a cashier at McDonalds.

Your Education Level:

Education is a third factor used by carriers to set rates. The more education, the lower your rates, all other things being equal. More education also usually means higher incomes on average. Again companies are looking at risk and not income directly.

Credit Score:

Finally, your credit score is an increasingly important to insurance companies when figuring out what your premiums should be. A lower credit score means higher rates. Low income people can of course have good credit scores and the wealthy can have terrible ones, but on average credit scores tend to go up as you move up the income ladder.

Industry Response

These factors are the ones most closely associated with income. Insurance companies will state that each factor correlates with the risk of an individual making an insurance claim. In fact, the industry as a whole has been highly critical of the report. For example, Paul Blume, senior vice president for the Property Casualty Insurers Association of America (PCI) says that getting rid of “several common insurance underwriting practices such as credit-based insurance scoring is counter to the empirical data that show these factors are strong predictors of risk.”

He goes on to say that: “Living within one’s means and paying bills on time are not traits that are restricted to any particular income bracket: they are universal qualities that exist regardless of income.”

The industry also says that rates have been falling in recent years with data from the National Association of Insurance Commissioners showing that average premiums across the whole US have fallen from $843 a year in 2004 to $785 a year in 2009. The industry thus claims that the free market is serving consumers well and that no more regulation is needed.

The CFA however, points out that there are other factors at play besides risk factors that correlate only with income. Less access to insurance agent offices, less competition in the lower end of the car insurance market, failure to adequately take into account the fewer miles driven by poor households, expensive forced coverage (collision and comprehensive insurance) for those leasing or buying a car on credit and unfair claims processing are all problems faced by lower income drivers according to the CFA.

Ultimately, the CFA does want more government regulation of the industry. They state that “a strong case could be made, on the basis of simple fairness, for some subsidization of state-required insurance.” Whether or not you agree with this assessment depends on whether or not you think the auto insurance market in your state is fair and competitive. At the end of the day, not much is likely to change for poorer drivers in the near future.

So What Can You Do?

Even through the car insurance market in your state is not likely to change any time soon, there are still a couple of options. The first is to look at our guide to How To Save Money On Auto Insurance. The second is to make sure you get several online auto insurance quotes. In fact, you can get started now with a free quote below.

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Read the full report: Lower-income Households and the Auto Insurance Marketplace: Challenges and Opportunities

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