What's Really Behind Your Car Insurance Rate?
What's Really Behind Your Car Insurance Rate?
Last week in Bloomington, Indiana, Tri-North Middle School hosted the "Reality Store" for 8th-grade students. The simulated life experience allowed the teenagers to pretend they were 28-years old and "shop" for a house, car, child care, and a dozen other necessary or discretionary expenses. One of the mandatory stops was the insurance table. The adult volunteers instructed students to calculate their monthly auto insurance rate as 10% of their monthly car payment. However, the reality of how insurance companies calculate your rates is much different.
Legal Discrimination
Insurance companies that want to issue policies in a state must file rates and forms with the Department of Insurance (DOI) before being licensed to do business or raise rates. The Indiana DOI regulates rates within the state to ensure they are fair, adequate, and not excessive or unfairly discriminatory. However, insurance companies can still give preferential premiums to drivers based on the criteria below.
In Indiana, companies calculate your rate based on:
- Age
- Gender
- Marital status
- Driving record (past three years)
- How many miles do you drive per year
- The primary purpose of driving (business, pleasure, or commuting)
- Where you live
- Policy limits
- Deductibles
- Type of car (including safety features),
- Driver training
- History of claims, and
- Your credit score
Although lawyers have challenged its legality, your credit score remains the number one determining factor insurance companies use to determine your premium. Why is that? Because if a driver has had issues paying your bills in the past, they will be more likely to file a claim. Most insurance agents will recommend you pay for minor damages out of pocket if you can afford it. If your net worth or income is sufficient, a high deductible is recommended to keep your premium costs as low as possible.
Policy owners should carry coverage that exceeds their net worth. If your net worth exceeds $500k, it's likely time to get an umbrella policy.
When Should You Shop For New Insurance?
Common life events that trigger a reason to shop for insurance include changing marital status (married, widowed, or divorced), adding a teen driver to your policy, or buying a new car or house are a few events that signal an opportunity to consider working with another company.
Moving To A New State
Since insurance regulation occurs at the state level, you will need a new policy if you move out of state. Shopping for a new company could save you thousands of dollars in the long run. You may find that the company you've been working with is the best option, or you could be surprised. Insurance prices vary widely between states.
The advisors at Hurlow Wealth Management do not sell insurance, but they do recommend shopping for rates every three years. If you would like to know more about this topic, we encourage you to watch one of the recorded webinars on the topic, Mitigating Risks: Insurance Planning Webinar.
If you are interested in risk analysis to understand how much property & casualty insurance coverage is sufficient for your situation, click here. Experience the comfort from knowing you have an appropriate safety net to protect your assets if disaster strikes.
