Low- to Moderate-Income (LMI) homes disproportionately includes populations of minorities, newly immigrated people, the disabled, veterans, working poor, unemployed, and single-parent households. These folks that make up the LMI pay higher car insurance premium rates. CarInsuranceCalculator.info provides you this week with an overview about the WHY’s and even more important: WHAT to do about it if you are a so called “LMI”.
Minority? According to some insurance scoring models he might fit in. Image: Hardtopeel.
Analyzing US Census Bureau data, the Consumer Expenditure Survey found that in 2010 LMI households spend about $30 billion for auto insurance (PDF), which is two-thirds of the amount of money they spend on mortgages (estimated at $45 billion). Why would car insurance cost nearly as much as paying for shelter? Here are four solid reasons that find statistically higher car insurance rates for those who can least afford it.
1. LMI Typically do Not Have the Savings in Place to Purchase a Car Outright and Must Finance; this Mandates Collision and Comprehensive Coverage that are Otherwise Optional
Financing a vehicle will automatically make the car insurance premiums much higher because of the cost of physical damage protection. Car lenders will require this to protect their investment in case of a catastrophic event where the car is totaled. They require being listed as “Loss Payee,” meaning that the car insurance company writes a claim check in the lender’s name first. If a car owner with a loan allows a car insurance policy to lapse, the lender could force a physical damage policy premium that is tacked on to the loan payment, typically much higher than a complete auto insurance policy that includes liability. Vehicles for Change President, Marty Schwartz states, “The biggest barrier to car ownership for many lower-income drivers is not the price of the car but the price of insurance. Insurance charges often exceed the cost of car payments. This is an important reason some drive without insurance.” For those with ample savings, cash purchased vehicles allows more flexibility in auto insurance limits and options. A good strategy for those without sufficient savings for their dream car would be focusing on an affordable, used car, rather than taking a loan. Verify if public transport would be an option until you have a sufficient amount of cash for an acceptable vehicle. You will not only save on insurance, but also on interest rates.
2. Many LMI Find it Challenging to Afford the Regular Maintenance and Upkeep of a Vehicle, Increasing the Risk of Claims
Brakes and tires are important to maintain in great shape to avoid accidents. Worn out brakes could cause a number of incidents such as backend accidents for failing to stop in a short period of time. An increase in these types of claims that are always considered “at-fault” will cause rates to soar or even make one ineligible for standard rates. Blown tires and flat tires can also cause an accident that will in turn also cause rates to rise. Tires are an expense that is difficult for LMI households to afford. This idea is no different than the idea that LMI homeowners might pay more home insurance due to the same types of reasons: They place claims that higher-income earners could potentially pay out of pocket. You can respond to this challenge by choosing a higher deductible (as much as you could afford in the case of an incident) and to check for every incident if there are alternative options rather than filing a claim. Maybe you have some friends or relatives who could help you fixing the situation? It might pay off.
3. Insurance Scores Based from Credit Reports Unfairly Target LMI who Struggle to Meet Payment Obligations on Time
This being the most controversial of insurance rating factors targets LMI households the most. The Consumer Federation of America calls this factor of insurance rating a backdoor way of using discriminatory income measurements to rate consumers.
Senior policy analyst Amy Traub at Demos (a watchdog group) agrees that insurance scores that are credit-based hurts the people with lower incomes because they did, in fact, place more frequent claims, but they were smaller claims and didn’t make “greater” claims as compared to claim amounts of higher income earners.
ResponsibleLending.org published a report on April 30, 2012 by Troy Anderson that, while most states allow insurers to take in account credit, there are 15 states that legislate for insurers to take in account “extraordinary life circumstances.” These are life events that could potentially prevent standard rates due to corresponding bankruptcies. Examples that would be taken into consideration would be a devastating illness, loss of employment, or death in the immediate family. Without these considerations, people who have bad credit or bankruptcies could pay in car insurance premiums “up to 200 percent higher than someone with good credit.” California already passed measures a few years ago that prevented credit from calculating in insurance scores; similar measures are pending in Maryland and in Illinois. What to do about it: Improving your credit score is easier said than done, however, you could start working on it with this guideon MSN.com.
4. Location, Occupation, and Educational Levels Now Factor with Many Car Insurance Companies Allowed by Most State Insurance Commissioners, Further Alienating the LMI, Working Poor, and Minorities
High-crime areas of low-income neighborhoods will automatically increase the cost of car insurance. Insurance companies view the policy from an urban high-crime area more likely to have a theft or vandalism claim. A 35 year-old single female in the South LA area of Watts will most likely have a far higher premium to pay than a 35 year-old single female in West LA area of Bel Air for the same car and same clean driving record. In some states, one 35-year-old female could pay more than another 35-year-old female of similar demographics except their level of education, which will make a difference according to an investigative reportfrom Rick Earle with WPXI-Pittsburgh. Earle called this a discriminating policy that also includes occupational discrimination. Statistically, lawyers and doctors have more accidents, but because they pay out-of-pocket for repairs or replacing their cars rather than file a claim, their rates are lower.
Is this Redlining or is this Legitimate?
American Insurance Association attorney Dave Snyder justifies these discriminatory allegations by claiming auto insurance is at it’s most competitive now and there are more people who benefit from these factors rather than pay more. Snyder says that excellent driving performance and personal financial responsibility are rewarded and rightly so. If someone feels they are paying too much, “there are literally hundreds of companies…competing for your business,” claims Snyder (cf. same source). On the heels of this report, California approved legislation that prevents insurance companies from basing rates on zip codes, regions, or neighborhoods. Your key takeaway: When choosing your home, don’t take only the rent into account but secondary payments which may occur as a consequence of your location: Will you need a car? Will your daily mileage be affected? Might your insurance premium be affected? Are these good enough reasons to make minorities, working class poor, the disabled, and other people struggling to make ends meet pay more? It is an older study, but this plays right into the answer to this question. In the Spring 2002 issue of the Journal of Policy Analysis and Management, Car Ownership and Welfare-to-Work discussed welfare recipients in the metro area of LA who were surveyed on car ownership, car insurance, and the coinciding odds of employment. The odds of employment increased 9% with car ownership, and an additional 4% increase was indicated if car insurance were merely $100 lower. Should insurance companies be in the business of social work? Perhaps not. However, finding more segmented ways to help pricing that won’t hurt the minorities, immigrants, and other disadvantaged can only help the markets, even insurance industries. After all, the more affordable companies made their auto insurance, the more policies they could sell.
Quick Guide: What to Do About it
To sum up: if you are interested in lowering their insurance rates you
could consider the following strategies:
- Reduce risk
- use a car only if necessary
- Add safety features to your car if possible
- Chose a better neighborhood – weigh the possibly higher prices for the rent against possible savings on insurance, transport, shopping
- Avoid drinking and driving
- Do NOT let your kid drive if she is still immature
- Stay within your limits
- Buy a car you can afford without taking a loan
- Choose your deductible wisely – a higher deductible can lower your premium, however, make sure it is not higher than you can afford to pay out of your pocket
- Avoid unnecessary insurance: Do you really need collision insurance for a $1000 car?
- Consider the factors which affect car insurance premiums and if there is something you can do about them
- Last but not Least: Compare – there are several car insurance companies out there and premiums might differ considerable, for the same amount of insurance
Image credit: hardtopeel
