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Education and Insurance Rates

When car insurance companies determine your rates, they look at a wide variety of data. Obviously, they check your driving record and the make and model of the car you drive. Most people also know that they consider your age, gender, and marital status - and yes, all of that is legal. But in recent years, car insurance companies have begun using even more information, such as your credit score, your education level, and your profession, when determining rates. Many consumer advocates and state legislators think car insurance companies are overstepping their bounds, and in New Jersey, the state legislature nearly banned the use of education and profession in rates. To the chagrin of consumer groups, the ban failed, but have consumers really lost out?

The Issue of Discrimination

The Issue of Discrimination

There was a time when everybody paid the same car insurance rates - no matter what kind of car they drove or where they lived. But then some crafty insurers began offering lower rates to rural customers since they were in far fewer accidents than their big-city counterparts. This is the reason that so many car insurance companies have "Farm"; in their names. Slowly but surely, car insurance rates have gotten more and more tailored to each individual, with the theory being that each person pays his or her fair share for the added risk they impose on the car insurance company. Insurance agents say that by making the people who deserve to pay more pay higher rates, everyone else pays lower rates. That's fair, isn't it?

Some disagree. After all, in the United States, it isn't often that discrimination based on things such as age or gender are permitted. Insurers can show that younger and older people cause more accidents than people in between, and that men cause more accidents than women - but does this mean that just being a teenager or senior citizen, or just being a man should automatically make your rates higher? The law says yes. But what if it were shown that members of certain racial groups were more likely to file claims? Here the law has taken a different stance, striking down anything that even hints of racial discrimination.

For example, in the sixties and seventies, car insurance companies often engaged in a practice called "redlining"; in which they would carve out sections of cities - mostly inhabited by racial minorities - and charge higher rates in these areas. This has since been outlawed, although using zip codes to determine rates is acceptable. Redlining was not explicitly racist, but the courts said it had a "disparate impact" on racial minorities. Similarly, it is argued that giving higher or lower rates based on education level and profession also has a disparate impact.

New Jersey Not Buying It

New Jersey Not Buying It

A sensible argument can be made for banning the use of education level and profession in determining car insurance rates. Consider the "red car" argument: If it is statistically shown that drivers of red cars are more likely to file claims then drivers of blue cars, should red-car drivers be automatically given higher rates? It's rather absurd to give someone higher rates based on his or her color preference, isn't it? Red-car drivers may get in more car accidents, but it is because of the drivers themselves, not the color of their cars. While a preference for red may be a sign of an aggressive driver, it is highly unlikely that the motorist's propensity for poor driving would not show up in some other actuarial factor - say, their driving record, for example.

The courts have previously ruled that income is a proxy for race, and that a customer's income cannot be used to determine his or her car insurance rates. Well, clearly education level and profession are proxies for income (far more than income is a proxy for race), so ipso facto, it seems obvious that using education and occupation would be illegal, right?

Not if the bill never even gets debated. State Senator Nia Gill was the lone legislator of the five-member panel in the New Jersey State House to support the ban, and other legislators - with the support of Governor John Corzine - prevented the issue from even being debated on the Senate floor.

So What Can You Do?

If you feel that your education level and job are being used against you, the best thing you can do is shop around. Even though it is legal in New Jersey (and most other states) to use these factors to determine rates, not all car insurance companies use them - in fact, most do not. There are dozens of factors that each company weighs and considers separately, so you never know which company will give you the best rates until you shop around.