Testing the Top Five Car Insurance Myths

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Geico Wall at Nationals BallparkWhen I first started driving, I was amazed at how much car insurance cost. I, like many other newly-minted drivers clutching our licenses, was put on my parents’ car insurance policy, which I’m sure made my parents nervous, and didn’t really feel the full brunt of new-driver-car-insurance-rates. However, when I finally left the nest and had to insure myself, I finally started hoping that 25 would come sooner because everyone says that car insurance rates drop significantly after you turn 25. (I spent all my <21 years waiting to be 21, then my <25 years waiting to be 25... now I'm waiting for retirement... the waiting never ends!) A few years ago, when I turned twenty-five, I had a great opportunity to test a few car insurance myths empirically and I'm happy to report the 25 year old rate drop myth is in fact very true.

Myth #1: Rates Drop Significantly After 25

This myth is true.

I requested car insurance quotes before I turned 25 and after I turned 25. The results were a little mixed but Geico, my current car insurance company, dropped my rate by about 15% after I turned 25. However, in each year after my 25th birthday, my insurance rates have been going down by a significant amount as well. While there were other factors involved (perhaps Maryland drivers became cheaper to insure, I hadn’t gotten into any accidents, etc), I believe each year after 25 is marked with lower premiums as long as you stay out of trouble. It just so happens that 25 is the first of the big drops, which explains its top billing.

Myth #2: Married Couples Pay Less Insurance

This myth is true, but probably not for the reason you expected.

The logic behind this myth is that once the male in the married couple gets married, he’s a safer driver and thus cheaper to insure. However, when I got married earlier this year (and told Geico), our rates dropped more so because there was a safer driver listed on my account. When I added my wife as a driver, the average riskiness of the driver went down and thus the premiums went down. In fact, I couldn’t even indicate marital status in my profile… they didn’t care. (there is also a component of the multi-car discount mixed in but I added her as a driver before I added her car)

Myth #3: Females Pay Lower Pemiums

This myth is true.

All other characteristics being equal, a female paid 18.8% less than a male in my car insurance quote study. The logic, on the part of insurance companies, behind this is that women are safer drivers and that men are reckless. Is that true? Who knows, but male drivers pay their premiums as if it were true!

(Odd factoid: Going to college lowers your premiums by about 7%, though it’s something that I doubt any company will verify, but don’t go too far… a Ph.D or an M.S. won’t give you more of a discount over B.S.)

Myth #4: Comprehensive Claims Don’t Affect Premiums

This myth is partially false.

Finally, a somewhat false myth! Conventional wisdom states that if you file a comprehensive claim, your insurer won’t increase your premiums. That part of the myth is true. The part that’s false is that if you ever leave that insurer, the new insurance company will charge you higher premiums for coverage. Is that fair? Probably not, but that’s how it works. In my car insurance quote study (near the end), I found that a vandalism claim increased rates by 8% and a vehicle theft or loss of belongings totaling more than $10k was a nearly 14% increase.

Myth #5: Your Credit Score Affects Your Premiums

This myth is true.

You might be wondering, why the heck does my credit score affect my car insurance premiums? The answer is more subtle than you might think. The reality is that not every claimable event is claimed (how many times have you been in an accident and someone pleaded to keep the insurance company out of it?) and insurance companies realize this. So they not only want safe drivers but also those who aren’t going to submit claims – a higher credit score usually indicates more sound financial footing, thus more money to pay for expenses out of pocket. Sneaky huh!?

Here are all the referenced articles:

(Photo: afagen)

{ 4 comments, please add your thoughts now! }

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4 Responses to “Testing the Top Five Car Insurance Myths”

  1. CK says:

    “Is that fair? Probably not, but that’s how it works.”

    Fair? The system works the same way for everyone. Isn’t that the essence of “fair”ness?

  2. Kevin D says:

    A couple points for clarity. First it is important to note that most insurance companies use different factors to determine their rates, so while having a college degree may give you a discount with one company, it may mean nothing with another.

    Additionally, the statement about comprehensive claims not affecting premiums is untrue, because unless they are prevented from doing so by state statute, most companies will in fact increase your premium because of comprehensive claims (or towing, or rental or any of the “not at-fault” claims). The reasoning behind this is that even though they are not at fault claims, the fact that you filed a claim in most cases means you are more likely to file another claim, and therefore are a higher risk deserving of a higher premium.

    Finally the credit score issue, which is a very contentious issue. I dont think the reasoning is as simple as people with better credit are more likely to pay for a claim out of pocket. In most cases the insurers arent using an actual credit score, they just have certain credit characteristics as components of their pricing model. Technically you could be a “good” insurance risk but have a “poor” credit score, as it is only some individual credit characteristics that usually matter. Articles like the consumer reports article always try to come up with a causal relationship between credit and likelihood of filing a claim, when there may in fact be no such causal relationship. Bottom line is that certain credit characteristics correlate nicely with likelihood to file a claim, so insurers will use them where permitted to charge a premium more reflective of an individual risk.

  3. Dave says:

    I recently called my car insurance, Liberty Mutual, to raise my premium and try to save a little. While on with them, I decided to pull out all the stops and try for anything I could get. Seems that LM does not give the age discount until you turn 30, I was quite disappointed to find that one out.

  4. Great article. It is always interesting to see how to work the rates and get what you can to get insurance cheaper.

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