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UPDATED: Mar 13, 2020
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Auto insurance is one of the unavoidable expenses of adulthood. While you can cut your cable bill, cancel magazine subscriptions and choose to buy in cash to avoid credit cards, you cannot avoid car insurance unless you choose not to own a vehicle. Because most people rely on vehicles to get them to and from work, school and other activities, car insurance is a necessary bill and it can get quite costly.
Although everyone is required to buy car insurance, some people pay substantially more for it than others. People with safe driving records and lots of experience will usually pay much less for coverage than those who are young, inexperienced or have a history of accidents. Age, experience, driving history and the type of vehicle being insured are not the only factors that influence auto insurance prices, however, and some of these other factors are outside of a driver’s control.
One fact that’s caused a controversy recently is that auto insurance costs more for poor people than for the rich for the same policy. Although insurance companies cannot technically discriminate against drivers due to race or income, some of the criteria used when assessing risk cause low-income drivers to pay substantially higher prices for coverage.
Credit Score as a Determination of Risk
Car insurance companies are relying more heavily on credit scores than ever before. A person with good credit is more likely to pay their insurance premiums on time, making them more reliable customers. More importantly, people with good credit also tend to have more expendable income, meaning they are less likely to file claims for small accidents.
Insurance companies hate handling small claims. Although the pay-out is only a few thousand dollars, the insurance company must spend the same number of staffing hours for adjusters, claims personnel and customer service representatives. Minor accidents are also much more common than major collisions. A person is statistically much more likely to be in multiple minor accidents in their lifetime than even a single major collision; this means that over the lifetime of the policy, an insurance company may need to cover multiple claims.
People with expendable income do not need to file claims for minor repairs. If repairs are fairly inexpensive, they will opt to pay for the repairs out of pocket to avoid the hassle of a claim. Poor people do not have this same luxury; most low-income households live from paycheck to paycheck and have little money left over for emergencies. This means that they will have a challenge covering just the deductible, not to mention repairs over that amount.
Not all low-income drivers have poor credit and not all people with poor credit live paycheck to paycheck, but there is a definite correlation between these three factors. Because the risk of multiple claims being filed over the life of a policy is greater, insurance companies will increase the rates, effectively penalizing poor people.
Other Risk Factors of Low-Income Drivers
In addition to possible poor credit, low-income drivers have other risk factors that will result in high insurance premiums. Because poverty and crime often go hand-in-hand, most poor people tend to live in neighborhoods with high crime rates. This means that a vehicle has a higher chance of being stolen or vandalized in a low-income neighborhood, so insurance companies must charge more for insurance to compensate for this risk.
Additionally, many poor people choose not to buy any car insurance at all. This means that poor neighborhoods will have a higher concentration of uninsured motorists than rich neighborhoods. The presence of uninsured drivers will lead to an increase in the overall cost of insurance because accidents with uninsured motorists cause insurance companies to lose money that cannot be recovered.
Furthermore, low-income drivers may be operating older used vehicles that are not equipped with all of the safety features or anti-theft devices that new cars come with. Insurance companies offer discounts based on these features, and people without access to these discounts will pay more for insurance by default.
Although car insurance companies cannot officially charge people more money just for having a low income, they are able to increase rates due to factors related to a driver’s wealth. Some states are working to alleviate this problem by providing state-funded car insurance assistance programs; other states have made it more difficult for car insurance companies to get a driver’s credit score.
Despite these changes, low-income drivers may continue to feel the high cost of car insurance for a long time. Until a long-term solution to this problem is made, it’s a good idea to focus on your own safe driving practices as much as possible. By driving safely and avoiding accidents and citations, you can qualify for more discounts and hopefully cut the cost of your coverage. You can further reduce the price of your insurance by comparison shopping for the best deal, taking advantage of any discounts you might qualify for and working on rebuilding your credit score.