Car insurance is meant to provide protection from a large financial burden in the event of a crash, but how do you avoid paying too much for coverage? “Shop around for car insurance” may be an insurance cliché, but it’s still the best advice on how to save money on your policy. It literally costs nothing to shop and can often result in hundreds of dollars in annual savings. How often should you look around? The answer is subjective, but we think you should look around every six months to make sure you’re getting the best deal. Here’s why:
1. You’ve maintained insurance coverage (and a good driving record).
Normally, car insurance is most expensive when purchasing a policy for the first time or after you’ve been without coverage for more than a month. In fact, some companies look at drivers without coverage as being too high risk and will not offer a policy at all until that person has been insured elsewhere first.
As you maintain continuous insurance for six months, however, you are seen as a better risk by more companies and eligible for a prior insurance discount. Data from The Zebra’s State of Auto Insurance report shows an average savings of $100 annually after being insured for just one year, and the discount continues to improve year over year.
Like most things related to car insurance, the amount of the discount varies by company, so shopping around every six months will help to maximize the benefit to your rate. And if you’ve had a lapse in coverage, it is even more important to compare rates since you may be losing part or all of the discount you have built up.
2. You had a birthday since your policy last renewed.
Here’s a nice birthday gift for most drivers — the older you get, statistically the lower your insurance rates are (to a certain point, that is)!
Shopping around for a new auto insurance rate is especially important for younger drivers on their own policy since they pay the highest rates, but older drivers can qualify for better rates based on age too. The Zebra’s research shows that rates drop by more than 50% on average for drivers between the ages of 16 to 19, drop slightly less than 50% for drivers between 20 to 25, and continue a downward trend until age 60, at which point they slowly increase as drivers age. The idea that rates decrease at age 25 is still correct, but the truth is that drivers can benefit from lower rates before and after their 25th birthday, and many other birthdays as well.
Further, since most auto insurance policy terms run for six or 12 months, you’ll hit a birthday at least every other term as long as you stay continuously insured. (And even if you are on a 12-month term, you can still shop around and switch in the middle of your policy period.)
3. Your insurance rates fluctuate.
Insurance companies often adjust their rating algorithms throughout the year to account for risk changes (think damaging storms or other weather events, changes in population, or even legislation), so rates can fluctuate month to month and even day to day. Although these rate changes are not usually significant on a short-term basis, they certainly can be over a six-month time frame.
This fluctuation essentially boils down to the fact that insurance companies are businesses – in fact, most major carriers are publicly traded companies and must answer to their shareholders, too. So if these companies have to pay out a lot in claims, they must account for that somehow so they remain profitable and financially solvent.
Insurance companies use historical data to forecast their potential exposure to claims payouts for the coming year and they may adjust what they charge in various areas due to an increase or decrease in risk. (Note, however, that the respective states’ insurance departments must review and approve any rate hikes before they’re enacted.)
4. Your vehicle value depreciates.
The value of your vehicle is constantly decreasing so reassessing insurance rates regularly helps to keep your vehicle’s value more relevant to your rate. In fact, our data shows that for each year a vehicle ages, the cost to insure it decreases by 2.4%. And for those fortunate enough to drive a luxury vehicle, rates are 20% lower for a five-year-old model compared to its newest version. In most cases, you will need to shop with a new company to take advantage of the cost savings since your existing company is less likely to adjust your rate. Why pay the same rate you did a year ago for a vehicle that has less value?
5. Carriers can be complacent.
Insurance companies can insure millions of drivers at any particular time, which makes actively monitoring every single policy for rate updates impossible. Getting new quotes will ensure that you are being rated on the most up-to-date factors (and discounts) and that irrelevant factors don’t hurt your rate.
For example, various violations like speeding or at-fault accidents are only legally allowed to be factored into your insurance rates for certain specified time periods. But if you have a traffic violation ticket on your record that passed that time period – but you are still in the middle of your policy term – you likely won’t see any decrease until your policy renews. Therefore, by staying with your insurer instead of shopping around for a rate from a different insurance company (one that wouldn’t be able to factor your previous violation into a new rate), you could be paying a significantly higher premium.
6. A lot of external factors apply.
There are factors outside of your control that cause you to pay higher rates even if you have a clean driving record. Insurance companies view drivers who live in highly populated areas, areas with high amounts of vehicle theft, or areas with extreme weather events as more expensive to insure because there is a higher volume of claims being filed in those areas, and thus, a higher likelihood that you will need to file a claim. What can make this exponentially worse is if you are insured with a carrier that covers a large portion of your community.
Sure, the company is receiving premiums from many drivers, but that also exposes those companies to much more risk because of the density of its customer base. Imagine if a violent storm were to cause extensive damage in your area; then your insurance company is going to be faced with enormous claims payouts, which, as we’ve said, can cause your individual rate to be higher due to the increased risk in your area. Shopping around may introduce you to a new insurance company that covers far fewer drivers in your area, resulting in a lower rate.
7. Life happens & keeps happening.
There are aspects of your life that can also lead to additional savings on car insurance. Married couples normally qualify for better rates than their single counterparts (saving an average of $74 annually) because they are viewed as a statistically lower risk. Credit can also significantly impact rates (in all but three states); our study shows that drivers can save 17% on their car insurance by improving their credit by just one tier. (You can view two of your credit scores for free on Credit.com.) Homeowners also pay about 2% less per year on their policies than renters. These factors may improve your rate with your existing company, but they also cause you to appear more favorable to other companies, which could result in significantly lower rates than even your provider can offer.
Because there are so many factors and variables the can cause rates to fluctuate, and because those things rarely line up on an annual basis, shopping around every six months will help to maximize your benefits and keep your insurance company honest. Insurance companies may have thousands, even millions, of customers at any one time, so it is up to each individual consumer to be on the hunt for the best rates.
Disclosure: The Zebra, the site I work for, is an insurance comparison marketplace.