Insurance companies claim that they don’t factor income levels into their equations when calculating premiums. In fact, they aren’t even allowed to do that since it would amount to discrimination. Why, then, do poor people seem to pay more for car insurance?
Insurers base their premiums based largely on the assessed risk of the insured. They use complex, data-heavy algorithms to do this using factors such as level of education, place of residence, and credit history. It’s easy to see how these factors link to income levels.
Income and Insurance Rates by the Numbers
The Consumer Federation of America (CFA) recently studied lower-income households and insurance policies. The study revealed that low-and-moderate-income households pay more for car insurance, sometimes coughing up to $900 more annually.
Data from the CFA reveals that low and middle-income consumers pay 40-92% more than wealthier consumers for their auto insurance. In 2020, a CFA insurance expert named Douglas Heller testified before Congress that even the best drivers are charged higher because of their job title or where they live.
Insurance companies know that to maximize profit and satisfy their shareholders, they have to mitigate risk. It’s known that the higher the uncertainty, the higher the risk and thus the higher the premiums.
For example, if you live in an urban city or a location prone to vandalism and theft, you will pay more because of the higher risk you pose to the insurance company.
Factors That Affect Insurance Premiums
Every insurance company uses a proprietary algorithm to calculate risk and, by extension, insurance premiums for everyone.
Insurance companies can use credit scores to calculate the likelihood that a consumer will file an insurance claim. A better credit score is likely to get you better insurance rates and vice versa, which reflects directly on income levels.
Every insurance company has a unique way of calculating credit-based insurance scores. State-level insurance regulators generally limit how credit scores can be used to calculate insurance scores.
For instance, credit scores can’t be the only factor used to calculate insurance scores. Some states also ban or limit the use of credit-based insurance scores, including California, Massachusetts, Maryland, Hawaii, Michigan, Oregon, Washington, and Utah.
Level of Coverage
Some insurers charge higher premiums for minimal liability coverage than for standard coverage. The CFA report compared statistics from states such as Texas, Arizona, and Arkansas, holding all factors constant except the extent of coverage.
In Texas, for example, an unmarried female driving a 2007 Camry with a spotless driving record paid $481 for minimum 30/60/25 liability coverage. The same woman would pay $454 for standard 100/300/100 coverage; the same pricing pattern was repeated among other demographics.
Low-income consumers are more likely to purchase the minimum required insurance than higher-income households, who are more likely to purchase standard and comprehensive packages. Thus, they pay more for less insurance coverage.
Additionally, insurance companies usually give discounts to consumers who insure multiple vehicles or opt for higher coverage. Those consumers are likely to earn higher incomes, but they get to pay less overall, especially if they choose higher deductibles.
Many demographic factors are used as a predictor of risk based on massive amounts of data that insurance companies collect over time.
- Marital status – married people are taken to be more stable and thus safer drivers
- Gender – women are safer drivers, according to statistics
- Age – younger drivers are less experienced and more likely to exhibit unsafe behavior
- Homeownership – owning your home may improve your creditworthiness
- Type of car – if you drive a “safer” car or one with more safety features, you may receive more discounts
- Level of education – college-level consumers are more likely to get lower premiums
- Job title – blue collar workers (such as cashiers) get higher quotes than white-collar ones (such as investment bankers)
Similarly, drivers with a spotless record and no history of claims can get lower premiums and more discounts than those with traffic violations.
Insurance companies usually consider your zip code when calculating premiums. People living in urban areas or those known to have high crime rates will be charged more due to the increased risk.
The problem is that low-income consumers are more likely to live in such areas regardless of their driving record, gender, or age.
Do Higher Premiums for the Poor Amount to “Redlining”?
Drivers who drive old cars, live in urban areas, and have poor driving records are more likely to attract much higher insurance rates. This makes insurance inaccessible or burdensome to the poor, and there is a strong debate over whether this amounts to discrimination or redlining.
Redlining is when insurance companies refuse to provide coverage to certain individuals because they’re deemed “too risky” due to their race, geographic location, or other factors. Since redlining is illegal, insurance companies won’t refuse to insure anyone because they’re poor or come from a bad neighborhood.
However, asking consumers to pay over $1,000 annually when they earn minimum wage makes it almost impossible for low-income individuals to afford good insurance.
While insurance companies will deny it, overpricing insurance is unfair even when income doesn’t factor directly into calculating insurance rates. Some people would argue that factors such as credit score and demographics are simply proxies for income, and it’s hard to disagree.
How to Get Lower Insurance Premiums (Even with a Low Income)
The government does its best to protect consumers by outlawing the use of any factors that could be discriminatory, such as race or income. Insurance companies have found a way to rope income levels into the equation, and there’s little the government can do about it.
That doesn’t mean low-income consumers are helpless. With a little more work, you can still find affordable insurance products to suit your needs.
Take advantage of discounts
Insurers offer many discounts and incentives that can lower your premiums significantly. Although available discounts are usually added automatically, you should shop around and ask your carrier about specific discounts you qualify for. These include:
- Good driver discounts for those with no traffic violations or who have passed a defensive driving course
- Multiple policy discounts if you bundle your auto insurance with others such as homeowner’s insurance
- Equipment discount for cars with safety devices such as alarms, active disabling devices, tracking devices, and many others
- Preferred payment discounts for those who pay annual premiums at once or through automatic billing
- Profession discounts for teachers, police officers, and veterans, among others
- Good student discounts for those with a 3.0 GPA or better
Insurance rates are reviewed annually and after claims. You may be able to maintain low premiums by driving safely and building up your creditworthiness, among other ways.
Shop Around for Cheaper Insurance
In a recent study, Consumer Reports discovered that 62% of respondents who switched auto insurers within the previous five years found cheaper rates. You can often find an insurance carrier with better rates if you shop around.