You Get What You Pay For? Not Always the Case with Insurance

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A cheap pair of shoes will probably wear out long before an expensive pair. And a housepainter with the cheapest rates may leave more smudges on your walls than the more expensive alternative. But when you pay less for insurance, that doesn’t necessarily mean you’re getting less value.

Unlike shoes and paint jobs, insurance prices don’t vary based on value: Each insurance company is required to pay for covered claims within the limits of your policy, so the value is the same from one company to another. But because each insurance company has its own unique rating system, prices for that coverage can vary significantly. For instance, a 40-year-old California male who drives a 2016 Honda Accord and has a good driving record and good credit could get the same insurance policy for $944 per year from one company, $1,379 from another company, and $1,967 from a third insurance company, according to data from Quadrant Information Services.

Why do the rates vary so much? Each insurance company has its own unique formula for assessing risk and determining how much to charge you, and each places significance on different things. Here are four criteria considered by insurance companies that can make costs vary, even for the same coverage.

  1. The type of car you drive. Insurers usually consider the number of claims reported on the model of car you drive—and those with high claim numbers are likely to demand higher costs for insurance premiums. So even if you’re a middle-aged driver with a good driving record, if you drive a car that lots of younger, inexperienced drivers also drive, that model may have a higher claims record, resulting in higher insurance costs for you.
  1. Driving record. Some insurers weigh your driving record more heavily than others, but all insurance companies will consider it. If you’ve had a lot of tickets or accidents, insurance companies are more likely to view you as a risky driver and charge you an increased rate for insurance.
  1. Insurance history. If you have filed several claims (such as three claims in three years), many insurance companies will rate you as a risk and will charge a higher price for covering you. Also, if you have any lapses in coverage, some insurance companies will view that negatively as well.
  1. Your ZIP code. Where you live can influence the likelihood that you may have an accident, as well as how much it would cost to repair any damages. For instance, traffic patterns, crime rates, and local weather all have an influence on your driving. If you live in an area with a high rate of accident claims, your insurance costs are likely to be higher than in an area with few claims and little crime.

Every insurance company has its own formula for assessing risk, but those formulas change from time to time. So one insurance company may offer the best rate for what you need now but a different company may offer the best rate in six months. To make sure you’re getting the best price for your coverage, it’s important to check rates on a regular basis. (Gabi does this automatically for customers: Learn more here.)

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