How Income Affects Your Auto Insurance Rates

According to recent studies by two consumer watchdog groups, traffic tickets, accidents and a less-than-perfect credit score aren’t the only factors that can increase your insurance premiums. If your insurance company thinks you have a low income, they will most likely charge you more than someone they think has a high income.

A study done by Consumer Reports in 2015 found that how much you pay for coverage depends more on certain socioeconomic factors than your driving record. Another study done this year by the Consumer Federation of America (CFA) alleges that applicants of modest means who have perfect driving records are often charged more than higher-income drivers who have DUIs on their records.  Are insurance companies placing an unfair burden on drivers who don’t deserve it?

How do they know your income?

In some states, insurers aren’t allowed to use your income as a factor in determining the rate you pay for coverage.   Even if their application doesn’t ask for your income directly, though, most insurance companies ask other questions that can give clues about your finances. Your marital status, your occupation, your education level, and whether or not you own your home and car all affect their perception of your financial circumstances. In their eyes, single people usually have lower incomes than married couples, and blue-collar workers have lower incomes than salaried workers. Lower levels of education also equates to lower incomes. And finally, statistically, the median income of renters is less than half that of homeowners. So if you are single and rent your home, they assume that you have less income than your married neighbors even if the reverse is true.

How much does your income affect your premium?

The CFA asked for 300 quotes from five large insurance companies in fifteen cities across the United States. They used a hypothetical driver profile for a 30-year old with no accidents or violations, who lived at the same address and who drove a 2006 Toyota Camry.   One female applicant was a married bank executive with a master’s degree who owned her home; the second applicant was a single female with a high school diploma who rented her home. One male was a married manufacturing executive with a master’s degree who owned his home; the other was a single factory worker with a high school diploma who rented his home.

The CFA’s study found that the insurance companies charged drivers who they perceived to be wealthier an average of $1,144 per year for basic limits. On the other hand, they charged drivers who they thought were low-income an average of $1,825 per year. The difference of $681 per year amounts to a 59% penalty assessed against drivers who they thought were low-income. And in some instances, the insurance companies offered coverage to the drivers they thought were wealthier but refused to provide quotes to the lower-income drivers – even though both had the same address and driving records.

How can I keep my insurance rates reasonable regardless of my income?

Here are some practical ways you can protect yourself against being overcharged.

• Shop around. The rates charged by insurance companies can vary significantly. Find the best rates and coverage possible.
• Know your credit score. Even if you are a single renter, the insurance company will consider a good credit score in your favor. The higher your score, the lower your premium.
• Take a driving course. In most cases this will lower your rates. Just be sure to confirm with your insurance company that the course you are considering taking will have a positive impact on your policy.
• Choose a higher deductible. This is one of the best ways to keep your monthly rates lower, without subjecting yourself to excessive financial risk.

Finally, if you think that the price you pay for insurance should be based on how well you drive, consider adding your name to the petition sponsored by Consumer Reports found at the bottom of this article.  Your state’s insurance commissioner monitors the rates charged by insurance companies and has the power to force them to provide transparency in their pricing.