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Factors that Affect the Price of Car Insurance

It can be easy to assume that insurance premiums are based on profit alone. The reality is that all auto insurance companies use formulas to evaluate how much of a risk it will be to insure certain types of people. If you’ve racked up a bunch of tickets in recent years, you probably already know that moving violations lead to higher insurance premiums, but you may not be aware that other factors that are largely out of your control, like your age, gender, and marital status, also play a role in your auto insurance rate. First, consider how your age comes into play.

Age

Younger drivers pay more for insurance than older drivers because of their inexperience behind the wheel. While this might seem unfair, insurance companies do base this decision on hard facts, as statistics show that younger drivers cause more accidents than older drivers. Teenagers pay the highest insurance rates of all, and for good reason. Not only are car crashes the leading cause of death in teens across the nation, but teen drivers are also three times more likely than those 20 and older to be in a fatal crash, according to the Centers for Disease Control and Prevention (CDC). The CDC also points out that young people between the ages of 15-25 only make up 14% of the nation’s population, yet account for 30% of the total cost for car crash injuries for men and 28% of such injuries for females. These unfortunate statistics make it clear that insurers aren’t picking on young drivers for no good reason.

Many states recognize the high rate of teen accidents and attempt to reduce it through graduated driver’s licensing laws. These state driver’s license requirements for new drivers slowly increase a teen driver’s road privileges as they gain experience and prove they can steer clear of tickets and wrecks. Insurers, on the other hand, respond to these statistics by charging more for coverage because teen drivers are more likely to file a claim. While this can mean high rates for parents of teen drivers, it’s good news for good drivers who are about to turn 25, as they are likely to see a significant insurance rate reduction.

Tip: To save money on auto insurance for young drivers, ask insurers if they offer good-student discounts. Since students who earn good grades are deemed more responsible, some insurers may reward them with discounts if they send in a copy of their report card. Taking a defensive driving course or driving safety course may also reduce the rates charged to young drivers. (Read More on Saving Money on Teen Car Insurance.)

Gender

Statistics also point to men being involved in more accidents than women, particularly among younger drivers. Research shows that men tend to exhibit riskier driving behaviors than women, partially because they are wired to express aggression in a more direct way than women, according to the Social Issues Research Center. This can lead to more competitive and hostile behavior on the road, such as road rage and racing, which in turn leads to a greater number of accidents. Men also more frequently demonstrate more rule-breaking behavior and higher levels of risk-taking than do women, the same research suggests.While these higher rates can be a downer for males who drive responsibly, the good news is rates for men tend to more or less equal that of women after age 30, according to the Texas Department of Insurance. And as we’ll see below, men can anticipate reduced auto insurance rates should they ever decide to get married.

Marital Status

Couples have more than a lifetime of loving companionship to get excited about once they get married. Many insurers will offer lower insurance rates to married people because statistics have shown they are less likely to get into car accidents than single people. While newlywed discounts may not be as exciting as your honeymoon destination, they are most certainly easier on your wallet.

Tip: One word of caution: If you intend to combine auto insurance with your spouse, be aware that your rates could actually go up if your spouse has a bad driving record since all licensed drivers that are covered under a single policy will be factored into the rating process.

Education Level and Career

Insurers also look at your education level and mode of employment when tallying your rates. Generally speaking, better-educated drivers pose less of a risk on the road than do high school dropouts, and insurers also assume that higher-earning drivers are more responsible than drivers with low incomes.

Accident History and Tickets

It’s no secret that having a laundry list of speeding tickets and car accidents to your name drives up your insurance rates. Insurance companies believe that drivers who have caused accidents in the past are more likely to cause them in the future, and may raise rates accordingly. While you may not see a rate increase for a minor accident or fender-bender if you have an otherwise good driving history, being found at-fault for a major accident or getting ticketed for reckless driving will likely lead to a rate increase and the loss of any good driver discounts. There’s a bright side for those who have caused a wreck: you should see a slight rate decrease for every year you are accident-free until the accident goes off your driving record entirely.

Tip: Certain auto insurers offer a perk called accident forgiveness, where the insurer agrees to not raise the rates of an insured driver with a good driving history just because they got into a single accident. If you are concerned about your rates going up after an accident, you may want to consider insurers who offer this perk. Just be aware that the accident will still remain on your state driving record and may be reflected in future premiums should you switch insurers down the road.

Similarly, moving violations like running red lights and speeding can also lead to higher rates, but expect rates to go through the roof for serious violations like being caught driving under the influence of alcohol or drugs. In fact, if you have too many accidents and tickets, you may be refused a standard auto insurance policy entirely and be forced to seek out a high-risk insurance policy in your state, which will offer less coverage at a significantly higher price.

Many states use a point system as a means of keeping track of drivers who might be dangerous on the road. Drivers accumulate points every time they violate a traffic law, and different numbers of points are assigned based on the severity of the violation. For example, in Virginia, a driver would receive three demerits for making an illegal U-turn but six demerits for getting caught driving 20 miles over the speed limit, according to the Virginia DMV. Once a driver gathers a specified number of points, or demerits, they could have their driver’s license suspended or eventually revoked. While this is bad news for those who make risky driving decisions, there’s also some good news: certain states, like Virginia, may also award safe driving points for every year you go without a traffic violation. Since your driving record has a direct impact on your insurance rates, you may be able to use safe driving points to your advantage to cancel out the negative points that could otherwise lead to higher insurance rates.

Family Members

Another factor that impacts your auto insurance rates are named members of your household who are covered under your policy. For example, family rates will go up when a teenager starts driving. However, it also comes into play in other situations, such as if your adult child moves back in with you to get back on his feet or if you take in an elderly parent. If these family members have access to your vehicle, you may need to list them as named drivers on your insurance, particularly if they will be using one of your vehicles on a regular basis. If any of these family members have a poor driving record, this could negatively impact your rates. On the other hand, adding on a family member with a good driving record could actually improve your rates. You can ask your insurance company ahead of time how adding certain family members will impact your rates.

Tip: To save money, you can ask your insurance company to exclude a family member from your insurance policy if you don’t want their negative driving history to impact your rates. However, you must be willing to certify that the excluded driver will not drive your vehicle and agree that they will not be covered by your insurance if they do wreck your car.

Where You Live, Type of Vehicle, and Average Mileage

Where you live and what kind of car you drive also factors in to your insurance rates. For example, urban areas typically have higher rates of vehicle vandalism, theft, and accidents than rural areas, and insurance companies take this into consideration when setting your rate. Similarly, if you upgrade from an economy car to a luxury vehicle, you will pay more for insurance because it costs more to repair or replace an expensive vehicle should it be damaged or stolen. If you are planning on moving to a different city or state, you may want to ask your insurer ahead of time how much your rate could be impacted.

Another important factor that impacts your insurance rates is the amount of miles you put on your car in a typical year. A car that is used for commuting to work five days a week will cost more to insure than a vehicle that is used only for leisure because the frequency it is on the road increases its risk of being in an accident. In that same vein, a 10-minute commute to work probably won’t impact your rates as much as an hour-long commute to work.

Tip: Some drivers may be able to save money by taking advantage of pay-as-you-drive insurance, or usage-based insurance. By allowing insurers to track how much you actually drive, insurers can accurately conclude how often you are actually on the road and may be able to charge you a lower rate. This may be especially advantageous to people who work from home. You may also be able to cut your insurance rates by taking advantage of public transportation, vanpools/carpools, or by cycling to work, if possible, so that your vehicle logs fewer miles.

Credit History

Last but not least, your credit history can also have an impact on your car insurance rates. In most states, it is legal for an insurer to take your credit into consideration when assigning risk since research has shown that those with poor credit have higher claims rates and higher claims payouts than those with good credit. For example, researchers at the University of Texas concluded in 2003 that “lower credit scores were associated with larger incurred losses,” and the Federal Trade Commission concluded in 2007 that credit-based insurance scores are an effective means of predicting risk for an auto insurance policy.

While this is good news for people who have excellent credit, it’s certainly discouraging to people who have bad credit, which can result from a variety of issues such as high debt, accounts that have fallen into collections, or bankruptcy. However, you do have some options to evaluate how much of an impact your credit has on the cost of insurance. The FTC recommends that people ask their insurance company questions when they are not getting the rates they want, such as if a credit system was used in the first place, what factors were taken into consideration, and if there’s anything they can do to mitigate those factors. By making payments on time and reducing your debt, you may be able to improve your credit and qualify for better insurance rates.

Tip: It’s a good idea to get a free copy of your credit score each year and dispute any errors you happen to find. This is important because a savvy identity thief can singlehandedly put your credit through the wringer, and a mistake by the credit bureaus can be costly.

As you can see, a variety of factors outside of your control, such as your age and gender, can have a significant impact on your insurance rates. Other factors, such as your driving record, the type of car you drive, and the people you name on your policy, are largely under your control. Drivers must keep these key factors in mind when evaluating how to get the best rate on car insurance.