Credit Score & Auto Insurance Premiums
Auto insurance companies love data. In such an industry centered on the calculation of risk, often no stone is left unturned. As such, insurance companies will check everything they can about an applicant before they determine if they will provide coverage for you and if so, how much they will charge them. One of the key things insurance companies check is a person’s credit score.
A credit score is a three-digit number which reflects a person’s creditworthiness. It paints a clear picture of a person’s financial behavior in relation to paying debts and bills. If you are a person who pays all his debts and bills in full and on time, your credit score will be much higher than people who don’t.
However, auto insurance companies don’t look at the regular credit score that banks check. Instead, they analyze some aspects of your overall credit history then create their own credit-based insurance score. This is because auto insurers only care about information that relates to car insurance. Unlike financial institutions, auto insurance companies are not interested in your income and location, but both need to determine the risk. The following are some of the things insurance companies check:
a) Length of credit history
b) Outstanding debt
c) Applications for new credit
d) Credit utilization
e) Payment history, including delinquencies and late payments.
f) Number of credit accounts held
Why do Auto Insurance companies check credit scores?
Insurance companies use an applicant’s credit-based insurance score (which is derived from credit history) to predict whether or not they’ll file claims. Auto insurance is all ab0ut balancing risk, so the insurance companies use that data to decide whether or not to give you coverage and to determine what you’ll pay in premiums.
But you may wonder, what exactly does credit history have to do with a person’s risk as a driver?
Well, according to the US Insurance Information Institute, there exists a direct correlation between insurance claims and credit. Statistics show that a vehicle owner with a low credit-based insurance score is more likely to file frequent and more costly claims than those with high scores. Also, people with lower scores are the ones who commit insurance fraud and exaggerate claims.
FICO also says that there is a link between how individuals use credit and how they drive or maintain a vehicle. In other words, a person who is careful with credit is likely to be careful on the road. Another independent study by the Federal Trade Commission found that insurance scores can be reliable predictors of risk.
How are credit scores used?
The extent to which your credit score affects your insurance rates varies between providers. This is because auto insurance companies use different algorithms to calculate insurance rates. However, if your credit score is low, there is no escaping paying higher premiums regardless of what algorithm is used.
It is important to note that in California, Hawaii, and Massachusetts, insurance companies are not allowed to use your credit scores. Instead, your rates are determined using your driving record and personal information.
What is Liability Insurance?
Liability insurance is a type of auto insurance that covers other people’s expenses resulting from an accident which the insured is responsible for. The expenses include repair costs, medical bills, and funeral costs if the accident was fatal.
Even the best drivers can sometimes make a mistake leading to an accident. As long as you are driving a car, there is always a chance that you may cause an accident. As such, it is a requirement in most states that all drivers have liability insurance.
If you cause an accident and you don’t have liability coverage, you risk losing everything you own if the victims sue you. As such, it is very important to have liability coverage.
What does liability insurance cover?
Auto liability insurance provides coverage for damage to other people’s property and injuries to other people that result from an at-fault accident. There are two types of liability coverage:
1. Property damage cover
This is used to reimburse accident victims for repair or replacement of belongings that may have been damaged as a result of an accident which the insured caused. For instance, suppose you lose control of your vehicle, collide into an oncoming car then crash into a nearby shop. In that scenario, you have caused damage to the other car and also to the shop. Your liability insurance would be responsible for paying for all repair costs both for the other vehicle and for the shop.
2. Bodily injury coverage
Most accidents result in injuries and in some terrible cases, death. If you cause an accident, your liability insurance will pay for the medical expenses, lost income, funeral expenses, and pain and suffering for the people you injured or killed in that accident.
Liability Insurance Limits
Liability insurance usually comes with a limit. The limit is the amount up to which the insurance company is willing to cover you. Each state has minimum coverage limits for property damage and bodily injury liability but you may buy additional coverage if you feel the need to.
The limit is usually expressed as a group number, for instance, 15/30/5. In this example, the policy provides:
a) $15000 bodily injuries cover for everyone affected by an accident you caused with a maximum of $30000 in total for everyone injured in the accident.
b) $5000 property damage liability coverage for property destroyed as a direct consequence of an accident which the insured caused.
How to decide liability coverage limits
While calculating your limit, you want it to be high enough that it can protect all your property but not too high that you end up paying too much in premiums. The first thing you need to do is to calculate your net worth. To do this, add up all your assets like your home, savings, cars, stocks, and others then deduct your liabilities like debts. You’ll want the middle number to be higher than your net worth. For instance, if you found your net worth to be $230000, a good policy would have 100/250/100 liability limits.
If you require more coverage, consider getting umbrella insurance which covers excess liability.
What is Comprehensive Coverage?
Comprehensive insurance is a type of auto insurance that covers any damage to your vehicle from causes that are out of your control. There are so many types of damage that can happen to your vehicle without it even being on the road. Comprehensive cover is meant to provide coverage where liability and collision insurance can’t.
What is covered by comprehensive insurance?
1. Windshield coverage
Chipped or cracked windshields are quite common. It only takes a small rock falling on the windshield to cause a crack. In some cases, the crack may be so small that you don’t have to fix it. However, when you must fix it, comprehensive coverage will pay for repairs. It doesn’t matter what caused the damage; any glass damage, including back glass, door glass, and sunroofs are all covered by comprehensive insurance.
2. Animal Accidents
Have you ever been driving then an animal jumps onto the road out of nowhere and causes you to have an accident? Well, this is a common occurrence especially in rural areas, forests, and other places where animals are common. One of the most common claims in the US is deer accidents. Comprehensive insurance covers that and any other animal-related accident.
3. Hail damage
Hail can strike at any time and you can’t always have your vehicle safely parked in a garage. With comprehensive insurance, you don’t have to worry about what will happen to your vehicle when a hail strikes because the insurance company will pay for damages to the vehicle or pay you in full for it in the event that it is totaled.
4. Fire damage
Fire can do a lot of damage to a car. A lot of people think that home insurance covers fire damage to your car if it burnt down while in the garage. This is not the case unless it was an antique. Comprehensive insurance covers such damage and any other fire damage including arson.
5. Stolen vehicle
If your car has been missing for over a month, comprehensive cover pays the actual cash value of the missing vehicle.
Any type of vandalism to your car including getting keyed or the neighbors' kids egging your car is covered under comprehensive insurance.
7. Flood damage
If you live in a place constantly affected by floods, you need comprehensive coverage. Depending on the severity of the flood, your car may sustain just a little damage or even get carried away by the water. Regardless of what caused the flooding, comprehensive coverage will dry your car out or pay for its actual value if the car cannot be found.
Deductibles and Comprehensive insurance
Owners of comprehensive insurance have a chance to reduce the amount they pay in premiums using deductibles. A deductible is simply that amount that a car owner is willing to pay first before the insurer pays for the rest when a loss occurs. For comprehensive insurance, deductibles are usually about $300-$500. However, depending on a few factors, you can increase or lower that amount.
How comprehensive insurance works
If, for instance, someone owns a Toyota Camry worth $12000 with a $1000 deductible and the car is completely destroyed by an earthquake, the vehicle owner will receive $11000 from the auto insurance company. If the driver doesn’t own comprehensive insurance, they will be responsible for the whole $12000 since neither liability insurance nor collision insurance covers that kind of damage.