Photo: Chuck Coker

Ordinarily, drivers pay for insurance based on generalizations about age, gender, marital status, and where they live. So, if you’re a teen driver, a young unmarried male, or another “risky” demographic, your premiums are likely to be high regardless of how often (or how well) you drive.

But what if you could pay for insurance based on your actual driving habits rather than assumptions? With rising gas costs, wouldn’t you want to drive less and save money at the pump and on your insurance policy?

Insurance companies have been experimenting with voluntary pay-as-you-drive plans for years, and several have recently introduced higher-tech versions, among them Progressive’s Snapshot (available in 33 states) and State Farm’s Drive Safe & Save (currently available only to OnStar customers in Ohio, California, Texas, and Illinois).

“The idea behind usage-based programs is to give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully,” Loretta L. Worters, vice president of the Insurance Information Institute.

Traditional insurance policies factor in your estimated mileage and safety record, but Worters says some drivers over or underestimate their annual mileage. Pay-as-you-drive programs actually track mileage and, in some cases, other information to offer discounts based on this driving data.

For instance, participants in Progressive’s Snapshot program install a small gadget called Snapshot near the steering wheel. Snapshot records data on when and how they drive, sends the data to Progressive, and after 30 days, customers find out if they’re eligible for a discount based on that 30-day “snapshot” of their driving habits. Snapshot tracks the time of day, mileage, and how often the driver slams on the brakes but not GPS location or speed.

“Because we determine a driver’s premium based on a mix of all these factors together, the Snapshot Discount is not based on any specific number of miles or instances of hard braking or driving late at night,” says Progressive spokesperson Brittany Senary. “People who drive safely, primarily during daytime hours, are most likely to get a discount.”

Savings average around $150 a year

Discounts can go as high as 30 percent, but the average savings is around 10-15 percent, which translates to savings of $150 per year on average. Drivers’ rates cannot increase with Snapshot.

State Farm’s Drive Safe & Save program only tracks mileage using OnStar vehicle diagnostics to report odometer readings. After at least 100 days of odometer readings, the annual mileage is calculated to determine the customer’s mileage-based discount, which is applied at the customer’s first policy renewal date. “The theory is if you drive more, through the law of averages, there’s a greater chance that you could be involved in a wreck of some kind,” explains State Farm Insurance spokesperson Kip Diggs.

Because of regulatory issues, discounts vary from state to state, and State Farm plans to gradually introduce the program in more states. In Texas, for instance, where the program was introduced last week, discounts range from 1 to 30 percent, with the highest savings for drivers whose annual mileage is around 500. However, if you drive long distances to work each day or take frequent road trips, your discount will be less dramatic. In fact, Diggs says the average driver’s mileage is between 12 and 15 thousand miles per year, which in Texas would mean a savings of about 3 to 5 percent.

Concerns about privacy and higher premiums

Privacy advocates worry that monitoring drivers’ habits is too intrusive, but insurers are quick to point out that these programs are voluntary and that drivers choose to participate because they want to save money. According to Senary, “countrywide, more than a quarter of a million drivers have participated in the [Snapshot] program. About one in four drivers who are eligible choose to sign up.”

Another potential barrier is the variable vs. fixed cost argument, especially if there’s a possibility of higher premiums (which is not the case with Snapshot; however, some State Farm customers who’ve underestimated their mileage may wind up in a higher tier or premiums). “Part of it is weighing the potential discount vs. me not knowing what I’ll be paying at the end of the year,” says John Canali, a senior automotive analyst with Boston-based Strategic Analytics, Inc.

Plus, hardware means an added expense to the customer or the insurer. “If companies are absorbing the cost of the hardware, that puts some boundaries on what they can offer to consumers,” adds Canali. In the case of State Farm, the program is only available to customers whose vehicles are already equipped with the OnStar device.

Despite these concerns, Worters says it’s an emerging trend that’s driven by cost-conscious drivers, safety-conscious insurers, and cities interested in cutting traffic congestion.

Canali points to telematics companies in Europe that are taking driver tracking even further. “It tracks how you drive and helps enable stolen vehicle tracking, things that potentially will get consumers thinking not just about what it saves them but what it adds to their quality of driving,” he explains. “I believe that they’re searching around the US, so we may see this in the future.”

Susan Johnston is a Boston-based freelance writer who covers business and lifestyle topics.

photo: alancleaver_2000

There is no silver bullet when it comes to shopping for auto insurance. Each auto insurance company calculates their rates differently based on their risk calculations and profit margins. Which insurer ultimately offers you the best policy price will depend on dozens of different variables. You’re going to have to do your homework, make some calls, and periodically make even more calls.

The good news is there are a lot of great options out there to fit the different life stages and situations in which you may find yourself. Whenever you find yourself facing a big life change or at a certain milestone, calling your insurer — and shopping around with at least three or four more companies — is a good idea. You might find that the insurer who offered you the best rates a month ago is trumped by another company’s offer.

So when should you go shopping and what discounts should you seek? You’ll find that auto insurance premium discounts are very closely correlated to 12 typical milestones.

 (Note that these are not universal situations that lead to a premium discount with every insurer. That is why it pays to shop around.)

1. You buy a new car: One of the main factors determining your auto insurance premium is the vehicle itself — and its risk and safety ratings. State Farm publishes vehicle safety ratings and the corresponding vehicle safety discounts (VSD’s). The Insurance Institute for Highway Safety (IIHS) and MSN MoneyCentral have risk and safety ratings as well. Take them into consideration if you want to keep your insurance costs low.

2. Your credit has improved: Believe it or not, many insurers now look at your credit score when determining your rates. “Overall, the credit score has become a critical factor,” says Jonathon Tudor, a spokesman for InsWeb, which offers auto insurance quotes. “Simply put, the better your credit, the lower your rate will be.” Some states place restrictions on how insurance companies can use credit data to determine rates — most restrictive, not surprisingly, is California.

3. You have been a good driver over an extended period: Three or five years (depending on the insurer) after you are in a traffic accident or receive a traffic violation, it may fall off of your records with the insurer, lowering your premium.

4. You get older: Those turning 21 and then 25 will see discounts.

5. You get married: Many insurers factor your marriage status into their risk equations. Those who are married are viewed by some insurers as less risky, and worthy of a discount.

6. You graduate: You’ll find that many insurers offer discounts to alumni of certain universities. If you check with your universities alumni association, you should be able to find a list of these companies. Some insurers will offer a discount to anyone with a degree (less risky than those without one).

7. You move: Naturally, an auto insurance policy in Paris (Indiana) is going to be lower than one for the same person and car in New York City. With location comes more or less risk to insure.

8. Your miles driven decrease significantly: The more you are on the road, the higher risk you are. Some insurers, such as MileMeter.com are taking this a step further and piloting programs that track your actual mileage. You can find pay-per-mile auto insurance programs at GMAC and Progressive as well. “Generally these programs will make the most sense for drivers who have a very short commute or who have a second vehicle that they rarely drive,” Tudor says.

9. You get another policy: Insurers that cover other industries, including life, health, and home, often will offer a ‘multiple policy discount’ when you sign on for another policy with them.

10. You change jobs or industries: Insurers offer discounts to employees of certain companies and sometimes of entire industries. Makes sense, right? An engineer will likely be a lower risk than a taxi driver.

11. You add another vehicle to your policy: Most auto insurance companies offer discounts for multiple-vehicle policies, however, that discount amount varies by company, so it’s best to shop around.

12. You install a theft deterrent device: Vehicles with a theft deterrent device often get discounts, so if you add one, it pays to ask. Some examples of theft deterrent devices include visible wheel locks, an alarm system, VIN chemical etching, wheel locks, and electronic keys.

Now, Get the Quotes
Each time you encounter one of the changes listed above, it makes sense to start shopping around. Choose three to five different insurers, let them know exactly what you are looking for so that you can compare apples to apples, and get your quotes. May the most competitive insurer win!

GE Miller offers more personal finance tips for young professionals at 20somethingfinance.com.

photo: fristle

This is part 2 in a 2 part series on how to lower your auto insurance premiums. The first part covered 10 variables that you can control when it comes to lowering your premiums, while this post will talk about 10 factors that are out of your control – and what to do about them.

Same Message, Different Company. Different Message, Same Company?

We’ve all seen the ads about how switching your auto insurance from ‘the other’ company to ‘our company’ has saved the customer an average of $XYZ. It’s most likely left you wondering how every single insurance company can save you more than every other one. What that same advertisement doesn’t tell you, of course, is how much the guy/gal who didn’t switch saved by staying with their current auto insurance provider or going to a different one.

And while we’re on the topic of auto insurance commercials, I’d like to take this opportunity to call out the marketing department of Geico. Seriously, guys? The gecko was a pretty cool guy and the caveman thing was slightly funny at first, but it’s simply gone too far. And now the googly eyes on a pile of dollar bills that somehow plays that 80′s song by that guy who is trying to sound like Michael Jackson. And running all three ad campaigns on the same medium at the same time? Collect yourselves, people!

Let’s continue with the ads. Wouldn’t you love to hear “Customers who switched to us saved $215 (while those who didn’t switched saved $357)”? When shopping for auto insurance, unfortunately, there really is no easy answer to the question of which company offers the lowest rates. The reason being is that most insurance companies, by design, use a different proprietary formula to determine what price they can specifically offer you. Some of the variables that go into this formula can be controlled by you, but most cannot.

So what should you do? How do you find the lowest rate? Before we go into premium savings strategy, it definitely pays to know what variables insurance companies are looking at when calculating your risk. Let’s take a look.

The Auto Insurance Premium Factors that are Out of your Control

Fair or not, auto insurance companies (and insurance companies in general) are master statisticians and they have determined the risk to have you as a customer for just about everything down to what color shoes you wear. These are traits or characteristics that you mostly don’t have control over, but are often used to calculate your auto insurance premium. Sure, you can change some of these things, but you would rarely change them just to get a break on your auto insurance.

1. Your age: Most policies give a reduction at 21 years of age, or with 5 years experience. A further reduction can be expected at around 24 or 25. Once you hit the ripe age of 70, you can expect the opposite to occur.

2. Your gender: Women are statistically safer drivers. This one surprises me as I’ve been a passenger while my wife is driving. She was in three accidents prior to meeting me and with my set of eyes to prevent her from driving through red lights when her attention wanders, she hasn’t been in any after meeting me. Sorry, honey, it’s true.

3. Where you live: Locales with high rates of accidents or theft can result in a higher premium.

4. Your past driving record: Some insurers look back three years, others look back five years or longer. Depending on the company that is quoting you and how recently you had a major traffic violation or accident, this can have a huge impact on your premium. Don’t worry about that pile of parking tickets in your glove box as they do not impact your driving record and premiums.

5. Your marital status: Married drivers can pay less than single drivers.

6. Occupation: Doctors tend to get in less accidents on average than ice cream truck drivers. Go figure.

7. College degrees: Most insurers give discounts to alums of certain universities.

8. Years of driving experience: similar impact as age.

9. Business use of vehicle: If using your vehicle as part of your job, you are at risk of a higher premium (and probably rightly so).

10. Multiple Vehicles: Are you insuring multiple cars on the same plan? If so, it could result in lower premiums for each vehicle.

Now that you know what you can and cannot control, what can you do about it?

The answer is simple. Shop around. Frequently.

It’s true that you may not have control over a lot of what your premium is based on, but your saving grace is that the auto insurance companies don’t all agree on how to precisely calculate your risk. Until they do, it pays to shop around.

When Should you Shop Around for Auto Insurance?

For starters, it might make sense to shop around after the following events take place:

• When you turn 21.
• When you turn 25.
• 3 years after you have a traffic violation or accident.
• 5 years after you have a traffic violation or accident.
• When you move.
• When your miles driven decreases significantly.
• When you graduate.
• When you get a new job.
• When you get married.
• When you get a life insurance policy.
• When you get a home insurance policy.
• When you add another car to you plan.
• When you install a theft deterrent device.
• When you get a new car.
• When your credit score has improved.
• Whenever you feel like it!

Final Thoughts:

There is no auto insurer who offers the lowest rates to everyone. But there is an auto insurer who offers the lowest rate to you specifically. You just need to find them. And it might be a different insurer six months or a year from now than it is today. That’s why it pays to know what the insurance companies look at, what discounts you might be able to swing, and to shop around frequently.

For more of G.E. Miller’s writings, visit personal finance blog MicroFrugality.com.

New! Compare Auto Insurance with Mint.com.

PhotoDu.de

When it comes to auto insurance premiums, there are a number of factors that you have absolutely zero control over. Most of us like to think that we’re the best drivers to ever hit the road, but we’ve all felt the pain of being 18 years old and having to pay considerably more for the same vehicle than the crazy guy who lives down the street. The injustice!

The good news is that there are a number of factors that you have considerable control over when it comes to your auto insurance premium. In the first of a two part series, we’ll cover the 10 prime factors that you have control over that most auto insurance companies consider in the formulas used to determine how much to charge you.

1. Switch Vehicles

Each vehicle is assessed a different risk variable depending on a number of factors, including category classification, crash test rating, price, cost of replacement parts, and even horsepower-to-weight ratio and how often the model is stolen. If you want a lower premium you should avoid sports cars, expensive vehicles, newer vehicles, and those that are not considered to be top of class in safety (smaller vehicles). Each year, the National Highway Traffic Safety Administration (NHTSA) reports an insurance make and model comparison. Each insurance company should share similar information, should you ask for it.

2. Pay Up Front

Some insurers offer a discount if you pay for the year ahead up front all at once versus a monthly payment plan. If you have the cash on hand to pay up-front, don’t worry about losing it if you switch insurers. Your insurance company is required to pro-rate your total bill and refund you for the days that you won’t be covered under them.

3. Drive Like an Angel

Believe it or not, your driving record is still considered to be one of the top factors that insurance companies look at. Whether you’ve been in an accident or received a major traffic violation within the last few years can have a huge impact on your premium. Some auto insurance companies look back three years, while others look back 5 or more.

4. Cut your Miles

A number of auto insurance companies will offer you a lower premium if you drive less miles. Makes sense for them and for you, right? Moving closer to work might not only save you on fuel and commute time, but it may also decrease your auto insurance premium as well. If you make a move closer to work or end up drastically cutting your mileage driven, call your insurance company to see if it can earn you a discount. A number of insurance companies are offering pay-by-the-mile programs, which may end up costing you less than traditional plans if you rarely drive at all.

5. Improve Your Credit Score

Credit history is becoming a much more highly valued variable that is being looked at by insurance companies (however, this is not allowed in the State of California). We’d recommend that you move to California if your credit history is terrible, however, the cost of living would more than cannibalize any savings in auto insurance.

6. Reduce your Insurance Levels

Whether or not you have collision and comprehensive coverage certainly dictates how much your premium will be, but your decision to carry it really should come down to how much your vehicle is presently worth. Each state has a liability coverage minimum that you should be aware of when determining how much you want to carry. We do not suggest lowering your coverage to the minimum to save money, as that may end up being a big mistake should you get into an accident. However, it might be to your benefit to keep an eye on your liability coverage if it is high and you are in need of cutting your premium.

7. Buy a Vehicle with a Theft Device or have one Installed

Purchasing a vehicle with a theft deterrent system or having one installed will most often get you a discount.

8. Same Insurer, Multiple Policies

Having multiple insurance policies with the same company typically gets you a hefty discount. As if comparing apples to apples wasn’t already hard enough, most auto insurance companies will give you varying levels of discounts for also having a home, life, or other insurance policy with them. You may find that even though one car insurance company would charge you more than another, your ‘total’ insurance cost to go with them is less.

9. Be a Loyal Customer

Loyalty can be rewarded when it comes to sticking with your auto insurance company. As witnessed by the massive amounts of advertising insurance companies partake in, the cost and value to acquiring a new customer is very high. That’s why a good number of insurance companies will give you a percentage off on your total premium each year just for sticking around. It’s also for this reason, especially if you’ve been a cheap customer for them in the past, that they may be a little more willing to work with you in lowering your cost than a Comcast might be. Stick around long enough, and it may be difficult to find a cheaper policy elsewhere.

10. Increase your Deductible

How high of a deductible you set has a significant impact on your premiums. For example, increasing my deductible from $250 to $500 reduced my overall premium by 25%. If you have an older vehicle with a relatively low value it makes a lot of sense to have a high deductible. It makes even more sense if you don’t have collision or comprehensive coverage to begin with – because there is not much else that would make the cost/benefit of having a low premium worth it.

What About All the Factors you can’t Control?

We’ll discuss those and what to do about them in the second part of our series on how to lower your auto insurance premiums.

For more of G.E. Miller’s writings, visit the personal finance blog MicroFrugality.com.

New! Compare Auto Insurance with Mint.com.