64 Million People Prefer the Cheapest Car Insurance to the Best Coverage
Car insurance is expensive. The average adult in the U.S. spends roughly $1,000 per year on coverage, according to the Bureau of Labor Statistics – more than we spend on fruits and vegetables, alcoholic beverages or our pets, for example. That helps explain why 64 million people, or 26 percent of us, say they want the cheapest car insurance rather than the best coverage, according to a new survey from the personal-finance website WalletHub.
A lack of financial literacy also plays a major role in consumers’ attitudes toward car insurance. Roughly 54 million people (22 percent of U.S. adults) say they do not understand their car insurance, WalletHub found. In other words, as invested as we are in protecting our wheels, millions of drivers still need a learner’s permit when it comes to their car insurance policy.
Part of the reason for consumers’ uncertainty is the confusing hodgepodge of insurance companies and regulations that are sufficient to make even a knowledgeable shopper’s head spin. “There are at least three areas in which the state in which you live will affect how much you pay for coverage,” Douglas Heller, an insurance expert with the Consumer Federation of America, told WalletHub.
For starters, minimum coverage levels vary by state. “Second, each state monitors, or regulates, the insurance industry in different ways,” Heller said. “In some states, such as California, before raising or changing rates and pricing practices, insurance companies must go through a strict review by government actuaries, lawyers, and other experts to ensure that rates are not inadequate, excessive, or unfairly discriminatory.” The third reason, according to Heller, is that “states may have different risk profiles related to things like traffic density, road conditions and maintenance, weather, and the cost of injury care and car repair.”
This, along with a general lack of subject-matter understanding among consumers, may also help explain why 63 million people, or 25 percent of U.S. adults, have never switched car insurance policies. Picking a policy the first time may have been hard enough, and no one wants to trade down by mistake.
There are also some trends in car insurance pricing that many consumers understand are happening but most do not agree with on the basis of fairness. For example, people with no credit pay an average of 67 percent more for car insurance than people with excellent credit. And two-thirds of WalletHub survey respondents believe it’s unfair for credit scores to affect car insurance costs. Yet most drivers don’t realize just how much of an impact their credit actually has.
Although just three states – California, Hawaii and Massachusetts – ban the use of credit data in car insurance pricing, “all should,” said J. Robert Hunter, director of insurance with the Consumer Federation of America. “It is a proxy for prohibited classes of income and race.” In other words, credit data could be a seemingly palatable way for car insurance companies to discriminate against certain groups.
Car insurance companies also factor gender and geography into policy pricing. And while the intent may be similar, consumer opinions on the practices are not entirely consistent. More than 7 in 10 people say it’s unfair to include gender in car insurance pricing, according to WalletHub’s survey, but there’s a 50-50 split regarding the use of zip codes. It may just be that gender and geography, particularly the latter, have a legitimate role in insurance pricing given their impact on risk.
A “combination of road design, speed limits, enforcement and driving culture,” make it more risky to drive in some cities and states than others, said Robert L. Rabin, the A. Calder Mackay Professor of Law at Stanford Law School.
Differences in weather patterns, traffic congestion and crime are key underlying factors, too. “Often variations in rates are impacted by geography (and more specifically) weather,” said Susan A. Shaheen, co-director of the Transportation Sustainability Research Center at the University of California, Berkeley. Other important considerations include “city size and traffic congestion (which can contribute to higher accident rates), demographic variations in the average age of a metro area (younger drivers and older adults can be associated with higher levels of risk), and crime (both vehicle theft and vandalism).”
Next Steps for Drivers & Legislators
At the end of the day, it’s clear that most drivers could use a refresher course on car insurance. However, our priorities seem to be in the right place, and new tools are making it easier than ever to find the best car insurance at the lowest price.
There are several steps in particular that cost-conscious drivers can take to save on car insurance.
1.Take advantage of discounts. You may be able to get discounts if you are a veteran, get paperless statements, have a good driving record, bundle policies, are a student or have an anti-theft system, for example.
2.Build good credit. People with no credit pay 67% more than people with excellent credit on average.
3.Drive safely. Safe drivers with no history of accidents, tickets or arrests can look forward to cheaper rates than people who haven’t been as responsible.
4.Look locally. Plenty of car insurance companies only cater to customers in certain regions or states. These local insurers may provide lower rates but are often overlooked. Make sure to include them in your comparison, at least.
5.Choose a higher deductible. An insurer may lower your monthly rates in return for a lower deductible - the amount you personally have to pay when you make a claim. This approach makes the most sense for infrequent drivers.
6.Consider pay-per-mile plans. You don’t always have to pay a set amount per month. There are also plans based on how much you drive. The insurance company will place a device in your car that tracks your mileage. It may also track things like your speed and braking, which could affect your rates positively if you’re a safe driver and negatively if not.
Consumers are not the only ones with room for improvement, however. There are plenty of things state and local governments can also do to improve the car insurance landscape for their constituents.
“The most significant thing a state can do to promote inexpensive car insurance is require insurance companies to justify their rates and practices before they can raise prices on drivers,” said Douglas Heller of the Consumer Federation of America. “Since governments require that drivers purchase auto insurance, the government has a special obligation to ensure that prices are fair and affordable.”