Facts About Car Insurance You Might Not Know

By KBB Editors 02/22/2022 8:52am

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When it comes to car insurance, what you don’t know can hurt you — and your wallet. But understanding how auto insurance works can help you make informed choices about your coverage. Here are some lesser-known, but important, car insurance facts to be aware of the next time you review your coverage or purchase a new policy.

Fact #1: Your Credit Can Impact Your Insurance Rate

Believe it or not, your credit may impact how much you pay for coverage.

Insurance providers have found that certain credit characteristics can help them predict losses. In many (but not all) states, insurers can use that information when setting premiums.

In general, five factors are used to calculate your credit-based insurance score:

  • your payment history
  • unpaid debt
  • age of credit history
  • new credit applications
  • your mix of credit accounts

This may sound a lot like the credit score lenders use when you apply for a car loan or credit card. However, your credit-based insurance score is different.

If you’re concerned about the impact your credit may have on your premium, take steps to improve it, and don’t forget to monitor your credit reports. If you find an error, dispute it right away.

If you live in a state that allows the use of credit-based insurance scores, remember it’s just one of many factors an insurer will use to determine your rate. Other factors include your age, driving history, location, vehicle type, and more.

Fact #2: Brand Loyalty Can Cost You

If your mindset about automobile insurance is “set it and forget it,” you might want to reconsider. Insurance companies use dozens of factors to determine rates, and each company weighs the factors they use differently, resulting in premiums that can vary significantly from insurer to insurer.

Instead of allowing your policy to renew automatically, comparison shop once a year to ensure you’re getting the best auto insurance rates. You can get quotes online from insurers or work with a broker or captive agent to compare pricing. Just be sure the policies offer the same coverage limits and deductibles, so you’re comparing apples to apples.

Fact #3: Stopping Payment? You Might Pay More

You can switch insurance companies at any time, but it’s important to do it the right way to maintain continuous coverage. You shouldn’t just stop making your car insurance payments on your current policy. Instead, call your insurer and ask about their cancellation policy. Some insurers may let you cancel over the phone. Others may require you to submit your cancellation request in writing. Some may even charge a cancellation fee.

Make sure you already hold a new policy in place before canceling your current one. Otherwise, you may face a lapse in coverage. If your coverage lapses, you could face higher rates on your new policy.

Fact #4: Your Car Insurance Company Can Cancel or Non-Renew at Any Time

In general, insurance companies can cancel your policy for any reason during the first 60 days it’s active. After that, there are usually only a few reasons an insurer can cancel your policy, including:

  • Failing to pay your premium
  • Having your driver’s license suspended or revoked
  • Experiencing a change in your health that makes it unsafe for you to drive
  • Lying on your application or when filing a claim

Cancellations can occur at any time, but non-renewals only happen at the end of your policy term. Non-renewals can happen for many reasons, including having too many speeding tickets, filing too many claims, experiencing a change in your credit, moving to a new location, and more.

Whether your insurer cancels your policy or chooses not to renew it, the company must provide you with written notice that they plan to terminate your coverage. The amount of notice they must give varies by state.

If you receive a notice from your insurance company that they are no longer continuing your coverage, you’ll need to act fast. It’s illegal to drive without insurance in most states, so getting new coverage before your current policy lapses is crucial.

Fact #5: You Could Save Money by Paying Your Car Insurance Premium in Full

When you pay your car insurance in installments, it could mean more work for the insurance company. So, some insurers offer a discount when you pay your entire premium up front. And if you don’t, it could cost you. Some insurance companies charge administrative fees when you pay in installments. They may also add a surcharge to your bill based on the method of payment you use.

Before paying your premium, ask the insurer what discount you may receive for paying in full and what extra fees they might charge if you don’t. Not everyone can afford to pay the entire premium at once. But if you can, it may help you save. Plus, you don’t have to worry about missing a payment or paying late — both of which could result in a cancellation notice.

Fact #6: Insurance Prices Vary by State

One of the factors insurers consider when determining rates is where you live. It typically costs more to insure a vehicle in areas with higher rates of theft, accidents, and natural disasters. Plus, different states have different minimum insurance requirements. So, states with lower minimums generally require lower average insurance costs. Here’s a list of the five states with the highest and lowest average auto insurance rates, according to Insurify.com.

States with Highest Average Monthly Cost for Car Insurance

  • Michigan: $515
  • Rhode Island: $371
  • New York: $351
  • Louisiana: $332
  • Delaware: $331

States with Lowest Average Monthly Cost for Car Insurance

  • Hawaii: $117
  • North Carolina: $138
  • Wyoming: $143
  • Maine: $145
  • Idaho: $148

Fact #7: You Can Use Discounts to Lower Costs

You may be able to negotiate the price of your vehicle with the dealership. But you can’t negotiate the cost of your car insurance with the insurance company. However, you can lower your premium by taking advantage of available discounts. Insurers typically offer a slew of discounts to help you manage your costs. Here are four of the most common car insurance discounts.

  • Multi-policy. If you need other types of insurance in addition to your car insurance, buying multiple policies from the same insurer may help you save.
  • Multi-vehicle. Purchasing coverage for multiple vehicles from a single insurer can often score you a discount.
  • Safe driver. Drivers with a clean driving record typically save insurance companies money. In return, the insurer may pass along some of those savings.
  • Homeowner. If you’re a homeowner instead of a renter, you may get a price cut on your auto insurance.

Fact #8: Your Age and Gender Affect Rates

Teenage drivers are more than three times as likely to be involved in an accident than drivers 20 and older, according to The Centers for Disease Control and Prevention. Because younger drivers pose more risk to insurance companies than older drivers, rates tend to be higher for this age group. All drivers under 25 pay higher rates than those who are 25 and older.

On average, men below age 25 pay more than women of the same age. However, the rate gap shrinks as drivers get older.

You Only Need Your State’s Minimum

If your only reason for purchasing car insurance is to avoid breaking the law, your state’s minimum requirements will be sufficient. However, if you’re buying insurance to protect yourself and your family from a financial loss, the minimum is unlikely to be enough. State minimum insurance requirements are notoriously low. If you’re in a severe accident, they’re usually not high enough to cover the cost of medical bills and vehicle repairs.

With minimum coverage, you could be on the hook for significant out-of-pocket expenses. A common rule of thumb is to purchase coverage that’s at least equal to your assets in case someone sues you after an accident.