Lower-income individuals may be paying more for car insurance, according to recent research by the Consumer Federation of America (CFA).
“Insurance companies are penalizing good drivers by hundreds and sometimes thousands of dollars each year based on economic and social status, and the end result is that the poor pay more, much more,” J. Robert Hunter, CFA’s director of insurance, said in a press release.
According to the study, those who have a higher economic status pay an average of $1,144 for car insurance each year, while premiums increased about 59% (to $1,825 each year) for those with a lower economic status.
The study looked at the five factors most insurance providers use to give an insurance quote that can help determine economic status: education level, occupation, marital status, homeownership status and whether they have owned a car for the past six months.
From there, the CFA used the online portals for the five largest auto insurers in the nation — Allstate, Farmer’s, GEICO, Progressive, and State Farm — to get quotes for a typically-mandatory basic liability car insurance policy in 15 major U.S. cities.
The research team established four different hypothetical personas used to apply for these policies: two men and two women who had opposing socio-economic characteristics, but were the same age, drove the same car, lived at the same address and had the same good driving record.
For example, “Female A” is a bank executive with a master’s degree, owns a home, is married, and has had car insurance coverage with the same provider for three years. Her counterpart, “Female B,” is a bank teller with a high school degree, is a renter, hasn’t had a car for the past six months (so no auto insurance), and is single.
According to the CFA study, two drivers with the same driving record and living at the same house paid two different premiums — the one who had a characteristic of a lower economic status paid higher premiums 92% of the time.
Breaking it Down by Provider & Location
The study found that four of the nation’s largest five auto insurers often charged 40% to 92% more (about $600 to $900 annually) to drivers because of their lower economic status, despite having perfect driving records.
Allstate and Farmer’s Insurance were found to charge the largest increases due to lower economic status drivers, CFA said, with increases of $915 and $900 respectively. Neither of these providers immediately responded to Credit.com’s request for comment about the study.
State Farm was found to have the smallest increase in rates for lower economic status drivers at $217 more each year, CFA said.
A spokesperson from GEICO said the company tries to offer low rates to all consumers and that “GEICO bases its prices on actuarially-justified costs.”
Progressive and State Farm also did not immediately respond to request for comment on the study.
“[The CFA] look[ed] at only five companies, instead of the entire insurance marketplace, which is almost 300 companies,” James Lynch, chief actuary of Insurance Information Institute, said. “It’s very difficult to say those are representatives of the entire insurance marketplace.”
Drivers in Queens, New York; Jersey City, New Jersey; Boston, Atlanta, Minneapolis, Houston and Jacksonville, Florida, saw the highest added expenses, with lower economic status drivers paying an average of more than $700 more each year, the study said.
Los Angeles reported the smallest difference in policy fees between lower-income and higher-income applicants, at $80 per year. This is due to California’s consumer protection laws, which prohibits providers from asking all of the non-driving related questions used in this report, except for marital status.
Applying for Car Insurance
During a tele-press conference on Monday morning, Hunter and Doug Heller, the co-authors of the study, acknowledged that their study did not factor in how a customer’s credit score would alter a premium. When filling out the application for the premium, they did not provide a Social Security number, so the credit scoring was left at a default setting for all policies.
Heller said he felt that if they had factored in credit scores, “it would have made [the discrepancies] a lot worse.”
Before you shop around for car insurance, it’s a good idea to find out where your credit stands. (You can take a look at two of your credit scores for free, updated every 14 days, on Credit.com.) If you discover your scores aren’t up to snuff, you may be able to repair your credit by doing things like paying down high credit card balances and disputing any errors you discover on your reports.
More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Can’t Make Your Car Payments
- Top 5 Worst Car Buying Mistakes