10 Things Your Auto Insurer Won't Tell You

Updated and adapted from the book, "1,001 Things They Won't Tell You: An Insider's Guide to Spending, Saving, and Living Wisely," by Jonathan Dahl and the editors of SmartMoney.

1. “When I say this is a good policy, I mean it’s good for me.”

While agents can help you navigate auto policies, some may not have your best interest at heart: Often, large auto and home insurers use “contingent commissions” to compensate agents who sold their policies. These fees come in two types: “steering” commissions for signing customers with a particular carrier, and profit-based commissions, when clients don’t file a lot of costly claims. The concern with the former is that unscrupulous agents push certain policies to reap larger commissions; with the latter, they might delay or discourage claims.

How to protect yourself? Ask about commissions, and have prospective agents explain their recommendations.

2. “Young drivers can't catch a break.”

Statistics show that drivers under age 25, especially male, are in a high risk group, and have difficulty getting insured. But the specifics are startling: Drivers in New York under the age of 19 pay a median auto insurance rate that is over 100 percent higher than drivers age 60 to 74, according to a 2009 survey published on InsuranceRates.com.

It typically takes three years of driving experience to be quoted a lower rate, according to AllInsuranceInfo.org's site. But there are other ways to ensure a better rate in the short term. For example, avoid sports cars and opt for a car with a lower engine capacity. Also ask your insurer for ways to score a lower premium. According to information posted on the AllInsuranceInfo.org site, some insurers will give a lower rate to young drivers who complete a defensive driving course.

3. “Spotty credit? That’ll cost you.”

Since the 1990s, insurers have discovered a strong correlation between low credit scores and filing lots of claims. Today, more than 90 percent of insurers use credit history in their underwriting, according to the Insurance Information Institute, a New York-based organization. Although consumer advocates argue that it unfairly penalizes the poor, it can also bite the middle class, says Birny Birnbaum, executive director at the Center for Economic Justice. After all, “87 percent of families in bankruptcy are there because of a job loss, medical catastrophe, or divorce,” he says.

Since many insurers do factor in credit history, it’s important to get your credit report from each of the three bureaus—TransUnion, Experian, and Equifax—and check them for errors before you shop for insurance.

4. “How do we set premiums? That’s for us to know and you to find out.”

As insurers continue to adopt complex pricing systems, not everyone is seeing savings. Why the disparity? For starters, premiums vary widely by state.According to a 2007 study from the National Association of Insurance Commissioners, the average year-long policy in 2005 cost $949—ranging from a low of $664 in Iowa to a high of $1,343 in the District of Columbia.

What’s muddied the waters even further are the formulas used to set premiums for individuals. Twenty years ago most insurers sorted customers into four or five pricing tiers, based on where they lived, their age, and their driving record. Over the past decade, hundreds of variables have been added to the mix, including credit history, homeownership, and limits on past policies. Since each insurer interprets these variables differently, it’s even tougher for consumers to get a handle on the system.