Car insurance is a necessity. No one enjoys spending money that they can only recoup when something bad happens.
However, car insurance can be an inhibiting process for those on a low income. Many of the actuarial calculations that car insurance companies make are directly correlated with income, meaning that a low income will make premiums higher. As a result, governmental bodies have intervened in order to subsidize car insurance for those on a low income.
Despite this contradiction, there is a wide range of options for those who want car insurance but have a low income.
This guide will talk about why car insurance is higher for those on a low income and will give tips on what steps you can take to reduce your premiums and make car insurance more affordable.
By being smart, either with your financial or driving decisions, you will be able to get on the road with an affordable insurance policy.
Income-related premium factors
Interestingly, not only will a low income make it harder to afford insurance, but it may actually increase the cost of your premium. Insurance companies factor in a number of different metrics when calculating your premiums, and several of these are either directly or indirectly affected by your income.
Your credit score is one of the biggest determinants of how much your insurance will cost. The Federal Trade Commission showed that drivers with a low credit score (525 or below) were more likely to file a claim. The outcome of this is that those with a low credit score will have a premium twice as high as those with a score of 825 or above.
According to research by TheZebra, the average annual premium broken down by credit score is as follows:
average annual premium ($)
Insurance rates also vary by zip code, indicating that those who live in low income areas may risk higher premiums based on their residency.
Since those on a low income are more likely to claim, the insurance company will assume that you are too.
Education level, while not a perfect indicator, correlates with both income level as well as insurance premiums. As your education level goes up, you’re more likely to have a higher income, and, your insurance premium is likely to go down.
For example, a PhD will reduce your insurance by $36/year on average (much less than the cost of getting your PhD).
TheZebra research shows that average premium costs by education level are clearly related.
average annual premium ($)
While this has less of an effect than credit score, it shows that completing at least a bachelor’s degree will reduce your premium, particularly when combined with the other factors mentioned above.
Insurance companies like to know that you have a long and solid history of insurance coverage and that you have more than the bare minimum of coverage.
If you have gaps in your insurance – for example, if you went through a period without owning a car (and therefore didn’t require insurance) – this will reflect in your premiums.
The cheapest premium will be for those who can demonstrate the longest period of extensive coverage.
Owning a home is, for an insurance company, preferable than renting a home. Owning a home shows that you are unlikely to move away suddenly, you are financially stable, and that your car is more likely to be parked in a secure location.
Those who rent are likely to see a slightly higher premium than those who own a home.