Car insurance can be confusing, and shopping for the best auto insurance policy can feel like looking for a needle in a haystack — especially as the industry changes dramatically during the COVID-19 pandemic. That’s why we turned to some industry experts to help us demystify car insurance and answer our burning questions. We spoke with Mark Friedlander, the Director of Corporate Communications for the Insurance Information Institute, and P.J. Miller, Partner, Vice President and Chairman of the Board at Wallace & Turner.
1. How does your job impact your car insurance premium?
Friedlander: Occupation is among the factors insurers use to determine your auto insurance premium. For example, a doctor is considered by insurers as a high-risk profession (with a higher-than-average accident frequency rate) and will typically be assessed at a higher rate than a schoolteacher. Another example: If you work from home, you typically will qualify for lower auto rates than somebody who must drive 30 miles each way to work five days a week.
Miller: Do you use your vehicle to deliver people, products or services? If so, you’ll need to be specific about that usage added to your personal auto policy. Depending on the usage and your insurance company’s stipulations, you might need a business auto policy (also known as Commercial Auto insurance). Think pizza delivery, courier service, Uber-type or other transportation network ride-share arrangements.
[ Read: The Best Car Insurance Companies in 2020 ]
2. Why do insurers care about your zip code?
Friedlander: Geographical location is among the factors insurers used to determine your auto insurance premium. Due to higher rates of vandalism, theft and accidents, urban drivers typically pay an auto higher insurance rate than those living in small towns or rural areas. Where you park your vehicle overnight (on a city street or unsecured parking lot versus a private garage at your home) may also impact your auto premium rate.
Miller: Insurance carriers are fine-tuning their sweet spots and that includes by location and that could be a good thing for you if claims are relatively low in your specific zip code. They’re also after such things as median income, home values (yes, even home values can impact auto insurance rates if a carrier wants to focus on high net worth prospects. Zip codes can sort out specific sections of a county or city, for example, and they can refine their pricing to target exactly who they want to insure.
3. What are the auto insurance discounts everyone should know about?
Miller: Increase your deductible. For example, from $500 to $1,000. But be aware that you’ll need to cover these initial costs in the instance of a claim, so be sure to set aside money, just in case.
Combine your coverage: Bundle your auto coverage with your home or renters’ insurance policy. Showing your loyalty to one insurer could help you land a discount, especially if you have multiple policies. Renew your plan early, and you could get a discount.
Eliminate coverage when you don’t need it: Older cars might not need collision coverage. If you haven’t already removed the physical damage coverage (comprehensive or collision) to reduce your cost, it can be a consideration.
Slow down: Speeding tickets can dramatically impact your rates. Being a safe driver can lower your car insurance by approximately 5%. Just because there are fewer cars on the road right now, doesn’t mean you should speed or disregard traffic laws.
Maintain a good credit score: Most carriers use credit as a portion of the rate-setting process, where permitted by law. While it is supposed to be a “portion” of the rate calculation, most believe it plays a significant role in determining a price.
4. How much can someone really save by comparing rates?
Friedlander: Premium prices can differ significantly, so it pays to shop around. It’s important to keep in mind that the lowest price isn’t always your best option. Make sure the company is reputable and financially strong (an agent can provide you with an insurer’s financial rating agency reports). Your state’s insurance department or online consumer information sites may provide information on consumer complaints by the company to help you choose the best insurer for your needs.
Miller: It depends on how much “shopping” you want to do, as rates can differ by a few dollars to a few hundred – in some cases, it can be a thousand or more but that probably means you’re paying several thousand already. The bottom line is, you have to find the company that gives the biggest discounts for your situation, such as excellent credit, low mileage, “clean” driving records, possibly college degree(s) and a skilled or professional job.
[ Read: Steps to Switch Car Insurance Companies ]
5. How are car insurance prices determined? Is it possible for them to become more expensive over time?
Friedlander: Auto insurance rates are established using multiple years of data, which leads to gradual premium changes in most cases. The amount a driver will pay for auto insurance is impacted by more than a dozen different factors – from the type of coverage you have to your driving record to where you park your car. While not all insurers use the same parameters (and regulations can vary by state), these are the most common determining factors by category:
|Driver Profile||Insurance Profile|
|Vehicle type||Previous coverage|
|Credit history||Motor vehicle record|
|Marital status||Miles driven|
Bonus: How could a policy become more expensive over time?
Miller: Increased age of the driver(s) – many carriers are increasing the rate on senior citizens, including pricing changes to age bands, such as at 70, 80 and over. Loss of discounts that applied when the policy was written but have faded over time. Poor continued claim experience (losses) for a specific insurance company or companies, in a given territory, zip code, state, or town/city.
6. What is a deductible? How do you choose one?
Friedlander: Deductibles are an essential component of the insurance policy. Understanding the role deductibles play when insuring your car is an essential part of getting the most out of your insurance policy. Deductibles enable the risk to be shared between the policyholder and your insurer. When you have a car accident, the amount of deductible is subtracted, or deducted from your claim payment.
For example, if your policy states a $500 deductible, and your insurer has determined that you have a covered loss worth $10,000, you would receive a claim payment for $9,500. One way to save money on an auto insurance policy is to raise the deductible. If you’re shopping for insurance, ask about the options for deductibles when comparing policies. For example, increasing the deductible from $200 to $500 can reduce collision and comprehensive costs. Going to a $1,000 deductible may save you even more.
Miller: When choosing your deductible amount, there are various considerations: the value of your vehicle, your risk for having a claim and others, but a priority is how much you’re willing to pay if you are in an accident. If you have a $1,000 deductible but can’t afford this in the instance of a claim, it’s not going to be helpful to you.
7. Is gap insurance worth it?
Friedlander: When you purchase or lease a new car or truck, the vehicle starts to depreciate the moment you drive away from the dealer. Standard auto insurance policies cover the depreciated value of a car. In other words, a standard policy pays the current market value of the vehicle at the time of a claim. When you finance a new vehicle and put down only a small deposit (less than 20 percent), the loan amount may exceed the car’s market value, during the early years of ownership. It’s a good idea to consider buying gap insurance for your new vehicle purchase if you:
- Financed for 60 months or longer.
- Made less than a 20% down payment on your car.
- Rolled over negative equity from an old car loan into the new loan.
- Purchased a vehicle that depreciates faster than the average vehicle.
- Leased the vehicle (carrying gap insurance is generally required for a lease).
8. How have car insurance industries adapted to the coronavirus?
Friedlander: According to Insurance Information Institute research, auto insurers have provided $14 billion in premium relief since March 2020 due to reduced driving across the U.S., primarily the result of stay-at-home orders, which have led to fewer vehicles on the road and lower claim frequency. Premium relief has come in the form of billing credits and cash refunds sent to drivers. Some insurers implemented the second round of premium relief in May and June as driving levels remained below normal even after states began to reopen.
In May, State Farm Insurance, the No. 1 auto insurer in the U.S., announced it would seek regulatory approval for $2.2 billion in rate cuts throughout the country due to reduced driving patterns. Once again, a result of reduced driving by customers.
Miller: Many carriers are providing flexibility for payments, and have suspended cancellations and late fees for auto insurance premiums. For example, Nationwide, Progressive and Allstate have all offered some sort of relief in response to COVID-19. Typically, no action is required on the policyholder’s part to receive these discounts or policy adjustments, but it’s best to confirm with your carrier, so you’re aware of their terms, as they do vary.
9. What long-term implications do you think the coronavirus will have on the industry?
Friedlander: If driving patterns continue to change and more workers shift to permanently working from home, versus having to drive to and from their place of employment every day, this could impact insurance rate changes going forward. We could potentially see other insurers follow the action taken by State Farm to broadly lower auto rates.
Miller: For the future of Virus coverage, it’s way too soon to tell what might happen, but suffice it to say, the exclusion will remain in the policies until the “pre-existing condition” of the preceding year wears off. Until then, this will cause a lag in any insurance companies testing the waters and daring to jump in — which begs the question, how much would it cost in premium dollars and how many property owners will actually buy the coverage?
This isn’t the tornado that leaves the damage in its wake and then is gone; this is potentially a year-round disaster without an accurate projection of when it will go away – an insurance company’s nightmare.
Too long, didn’t read?
No one starts out as an insurance pro. Finding the best car insurance policy is a journey, not a one-step process. Here are a few takeaways:
- It’s reasonable to ask questions and make sure the company you choose offers what you need at a competitive rate.
- Undeniably, the drops in driving and the ripple effects of the coronavirus has left the car insurance industry in a transitional time.
- While many providers have offered relief to policyholders through credit and rate adjustments, others look to the future of what car insurance will look like after 2020.
Mark Friedlander was appointed as the Insurance Information Institute’s Director, Corporate Communications in February 2020. Friedlander’s extensive background also includes senior marketing and communications roles at Prudential Financial, HSBC Holdings plc and Arthur Andersen LLP. Follow Mark on Twitter.
P.J. Miller is a Partner, Vice President and Chairman of the Board at Wallace & Turner. He holds a Property & Casualty license and has served as a Continuing Education instructor for the Ohio Independent Insurance Agents Association.
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