Personal Finance

Higher education equals lower car insurance

Question: Is it true that people with less education may pay higher car insurance premiums? 

Answer:  Yes.  As controversial as it may be, the education level of drivers can be taken into account by auto insurance companies (if your state laws permit, and most do), and thus could result in someone with a high school diploma paying more for car insurance than a person with a college degree.

As the advocacy group Consumer Federation of America points out, there are many non-driving behaviors that auto insurance companies look into when calculating motorists' premiums.  (See "Drivers to insurers: Watch our driving, not our wallets ")

Such rating factors can include:

Why?  Because insurance companies look into where the risk is and rates drivers accordingly.  Studies and actuaries have determined that certain behaviors or risk factors are predictive of who is likely to have more accidents -- and thus claims that auto insurance companies have to pay out. 

For instance, it's been proved that teenage drivers are much more likely to be in car accidents than older, more mature drivers. 

Also, the Federal Trade Commission (FTC) studied credit-based insurance scores and car insurance and found that credit information was indeed an effective predictor of claims that consumers will file.  Thus, in states that allow this as a rating factor, car insurance companies can use your credit score to predict your future claims, and thus use it in their calculation of your final premium. (See "The double-whammy of bad credit")

State laws try to protect consumers by not allowing discrimination based on factors such as age, color, sex, marital status, occupation (typically tied to your education level), but this is normally in regards to acceptance decisions (refusal to write, non-renewal or cancellation of a policy), not in the rating system itself to determine your premium amount. 

Insurance companies are expected to show clear actuarial justification for rating differences they use based upon non-driving factors, such as education. 

For example, New Jersey's Department of Insurance did a comprehensive study into the use of occupation and education factors in auto insurance.  As part of the report, car insurance companies' detailed loss data revealed that different occupation and education levels had different degrees of loss, thus making use of these factors valid.

If you don't have a college degree, don't get discouraged. Just because education can be used doesn't mean it will, or that it makes that big of a difference. 

State laws vary on how rates can be set, and auto insurance companies themselves weigh different factors differently.  While education may be important to one, it may mean very little to another.

Items that are actually driving related are some of the most important data auto insurers look at.  These factors include:

  • Vehicle type and use
  • Miles driven annually
  • Driving record
  • Claims history
  • Years of driving experience

Non-driving and driving rating factors together, plus the type of coverage and limits you want on your policy, help determine your car insurance base rates.  And some items that are non-driving, such as occupation, may not be factored into the base rate, but used instead to determine potential discounts.

Look here at six jobs that can get motorists car insurance discounts because they've been found to file fewer claims (some don't require a college degree).   And your job doesn't have to be of high-status, we've even seen discounts for beer makers.

If you feel like your lack of education is raising your auto insurance rates, the best thing to do is shop around.  Insurance companies rating system vary immensely. By comparison shopping with several auto insurance providers you'll be able to find the best possible rates for whatever your station is in life.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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