Auto insurance companies use a number of criteria to determine car insurance rates. The type of vehicle you drive, your driving history, and the amount of coverage you desire all come into play.
Insurers also use your ZIP code when issuing car insurance policies because where you live is associated with a particular level of risk. Areas with heavy congestion or bad road conditions can lead to increased car accidents. High-crime areas are also seen as risky to insurers because there can be a greater chance of you filing an auto theft claim.
These are just a few examples of how an increased risk associated with your ZIP code can lead to higher auto insurance rates. The opposite is also true. If you live within a ZIP code that’s viewed as less risky to insure, you may benefit from lower rates.
Why is your ZIP code important for insurance?
Auto insurance companies want to make sure they are collecting more money in premiums than they are paying out in claims. If where you live is seen as having a greater likelihood of you filing auto insurance claims, the insurance company will typically give you a higher auto insurance rate to offset the money they may potentially need to pay out in claims.
While the particular city and state you live in can help determine that risk, your ZIP code gives insurance companies a more specific picture of the risks that come along with insuring you.
However, some states – including California and Michigan – have laws that prohibit insurance companies from using ZIP codes as a rating factor.
Take note of garaging address
When you’re working with an insurance agent or trying to get a policy quote online, you may come across the term "garaging address." Your garaging address is simply the primary place where your vehicle will be parked overnight – even if it’s not actually in a garage.
Insurers use your garaging address in the same way they use your ZIP code. Knowing the primary location for your vehicle helps auto insurance providers evaluate the risk associated with insuring your car.
How insurance companies use ZIP codes to determine risk
Auto insurance underwriters use the statistical data associated with your ZIP code to determine the risk of insuring your vehicle where you live.
Some of the risk factors they might consider include:
Average claims history in that ZIP code
Population density
Traffic patterns
Accident rates
Road conditions
Natural disasters
Crime rate
The amount of uninsured motorists
Cost of living
Now, let’s dive a bit deeper into these location-related risk factors.
8 risk factors for car insurance that vary by location
If you live in an urban area, chances are you’re going to face higher car insurance prices than if you were to pack up and move to a rural area. Busy cities tend to have more people on the road causing accidents and higher crime rates, which might have insurance companies shelling out more money for instances of car theft or vandalism.
Here’s what else insurance companies look at when determining the cost of car insurance premiums.
1. Claims history
The amount of auto insurance claims filed within your ZIP code can affect your premium. If drivers in your ZIP code tend to file more car insurance claims than average, insurance underwriters might issue more expensive policies.
2. Population density
More people living in an area generally leads to more cars on the road, more traffic congestion and higher accident rates. Auto insurance policies tend to be more expensive in high-density areas as a result.
On the other hand, ZIP codes with a low population density usually have less occurrences of car accidents, and auto insurance policies in those areas tend to be cheaper.
3. Traffic patterns
Another factor that impacts car accidents – and thus, auto insurance claims – within a ZIP code is traffic patterns.
Roads with high speed limits, curvy roads with visibility issues, complicated intersections and unclear signage can all lead to higher rates of traffic accidents. Insurance companies would view those areas as riskier than places where traffic patterns promote safer driving outcomes.
4. Road conditions
The conditions of the roads themselves can affect your probability of filing auto insurance claims. Roads with potholes, rough surfaces, and debris can end up damaging vehicles or causing car accidents as drivers attempt to avoid the unsafe road conditions.
Streets that flood easily during rain showers and roads that quickly turn icy in frigid temperatures are also hazardous and may lead to more accidents or vehicle damage. ZIP codes with many roads in poor or potentially dangerous conditions are considered more risky and can wind up costing drivers more in auto insurance premiums.
5. Natural disasters
Living in regions prone to natural disasters – including hurricanes, tornados, earthquakes, and blizzards – can increase insurance costs because insurance companies typically have to pay out more money in claims following such an event. In an attempt to balance out the probability for increased claims, drivers in those areas typically have to pay more in insurance premiums.
6. Crime rates and vandalism
ZIP codes with higher crime rates – particularly when it comes to auto theft or auto vandalism – are viewed as riskier to auto insurance companies.
7. Amount of uninsured motorists
If your ZIP code tends to have more uninsured motorists illegally on the roads, you can probably expect to pay more for your auto policy. If your vehicle is hit by an uninsured driver, there’s no insurance company to cover auto repairs or medical bills you might have as a result.
8. Cost of living
Perhaps surprisingly, even cost of living can have an impact on your auto insurance premiums. If you live in an expensive ZIP code, you can likely expect to pay more at the auto body shop following an accident. The cost of medical care might also be higher than average.
Insurance companies footing your repair bills or doctors’ bills can expect to pay more when claims are filed in high cost-of-living areas.
How your location can affect your car insurance coverage
Your auto insurance premiums are also affected by laws that set minimum coverage requirements in your state.
For example, drivers in Texas are required to have liability insurance that covers $30,000 per person for injuries, $60,000 total for all injuries and $25,000 for property damage per accident. In Iowa, drivers must have liability coverage at $20,000 per person for injuries, $40,000 total for all injuries, and $15,000 for property damage.
More coverage typically means higher car insurance costs for the driver.
Even if your state doesn’t require it, you may choose to purchase more coverage – such as comprehensive coverage or collision coverage – so that you feel confident you won’t have to pay exorbitant out-of-pocket costs if you were to get into a car accident.
Additionally, some states – including Florida, Massachusetts, Michigan, New Jersey, and New York, plus a few more – are no-fault car insurance states, meaning your insurance company pays injury-related expenses after a car accident regardless of who was at fault.
Insurance policies for drivers in these no-fault car insurance states tend to be higher, because you can never count on another driver’s insurance company to pay for the costs associated with the car accident, even if they technically caused the accident.
Other factors that affect car insurance rates
Where you live is not the only factor that car insurance companies evaluate when issuing policies and setting insurance rates. Your vehicle type, driving history, age, marital status and even your credit score are other determinants that can either place you in a preferred risk category or a high-risk category.
Driving record and accident history
While you don’t have control over things like population density or the crime rate in your area, you do have some control over your own driving record. Practicing safe driving habits can reduce your chance of accidents on the road.
Car insurers view drivers who have no car accidents, DUIs or traffic tickets on their record as being less risky to insure.
Credit score
Studies have shown there’s a correlation between credit score and the probability of filing car insurance claims. Drivers with excellent credit – known as credit-based insurance scores – tend to file fewer car insurance claims, while those with poor credit typically file more claims.
Vehicle type
The type of car you drive also impacts what you’ll pay in auto insurance. The costlier your car is to repair or replace – or the increased likelihood that it’d be a target for car thieves – the harder it will be to find cheap car insurance.
Vehicle usage
How you use your vehicle is another thing insurance underwriters may consider. You’ll typically pay less if you don’t drive your car much compared to others who have long commutes or take frequent road trips.
Navigating ZIP code-related challenges
Living in a ZIP code that insurers deem risky doesn’t mean you’re guaranteed to have to pay high auto insurance premiums. Here are six tips for getting affordable auto insurance in high-risk areas.
1. Maintain stellar driving habits
Practice safe driving to avoid car accidents, so you can build up a history of no insurance claims. Taking a defensive driving course can also help you get lower car insurance rates.
2. Improve your credit score
Insurance companies correlate good credit with the likelihood of filing fewer auto insurance claims. Boost your credit history by paying bills on time and making increased debt payments.
3. Compare car insurance quotes from multiple companies
Always get quotes from multiple car insurance companies, so you can consider your options and nail down the best deal. You can work with insurance agents to help you compare costs or use online insurance calculators that give you a side-by-side comparison.
4. Ask for available discounts
Most major auto insurance companies offer discounts for things like bundling your auto and homeowners insurance, being a safe driver or enrolling in paperless billing with auto-pay. Contact your insurance company to ask about which discounts you might qualify for.
5. Re-evaluate your coverage needs
If you have an older, paid-off vehicle and enough savings to cover repairs, you might not need full coverage on your vehicle. Assess your situation to determine the coverage levels you truly need.
6. Adjust your deductible amount
Your deductible – the amount of money you’ll pay out-of-pocket before insurance kicks in – affects the cost of your insurance premiums. Generally, if you opt for a high deductible, you’ll pay a lower premium. However, you need to be prepared to pay out of pocket for any repair bills or medical bills if you get in a car accident.
