How Bad Credit Could Be Doubling Your Car Insurance Bill

You've probably heard by now that in some vague way, your credit rating has something to do with the premiums your auto insurance company charges you for coverage. But if you're like me, you've probably never quite understood the details of how this work.

Fortunately, the good folks at InsuranceQuotes.com -- a subsidiary of Bankrate (RATE) -- recently published a report that draws back the curtain on this little-understood quirk of the insurance industry.

Blame it on FICO

Used to be, the rate you paid for insuring your car was tied primarily to demographic and personal factors that were clearly connected to the risk that you'd damage your car and ask the insurance company to pay for it: things like your age, sex, marital status, and driving history. It won't surprise anyone that younger, unmarried men are more likely to be risky drivers than soccer moms, and should therefore pay higher premiums. But about 20 years ago, the folks at Fair Isaac Corporation (FICO) found a correlation between low credit scores and a higher risk of filing an insurance claim.

That's not causation, of course -- having bad credit doesn't somehow cause you to crash your car. But according to FICO, "people who choose to effectively manage their finances are also less likely to have future insurance losses." Conversely, there is a "statistical correlation between a person's credit score and the likelihood that he or she will file an auto insurance claim in the future."

Shazzam! Suddenly, FICO had a new way to hawk its credit histories to insurance companies -- and insurance companies had a new excuse to raise your rates.

News Flash: Everybody Does It

Ever since, insurance companies have used this finding to tweak the rates they charge you for insurance. Today, says InsuranceQuotes, "about 97 percent of U.S. insurance companies" do it.

But how do they do it, exactly?

InsuranceQuotes.com wanted to find out, and so they ran some tests, requesting quotes for a hypothetical insurance customer with the following attributes:

• Age: 45
• Sex: Female
• Marital status: Single
• Accident history: No prior claims
• Insurance history: No lapses in coverage.

In essence, InsuranceQuotes started with the perfect candidate. Neither too young, nor too male, to be considered an unsafe driver. Spotless driving history. Just the person you'd expect an insurance company to consider low-risk and to offer a low insurance rate. Now let's see what happens to her rates as her credit history changes.

• Excellent "credit-based insurance score" (not the same as a FICO credit score): No effect
• Median score: Premium goes up by 24 percent
• Poor score: Premium goes up by 91 percent

Ignorance Is Not Bliss

As you can see, there's some pretty serious coin at stake here. Yet according to a 2005 report out of the Government Accountability Office, roughly two-thirds of consumers surveyed had no idea that their credit rating could affect their insurance rates at all -- much less cost them nearly double for poor credit.

It literally pays to know the truth about this. And the truth is that if you're among the two-thirds who don't know the details of how insurance companies use credit history to determine your rate -- and if you're a customer of one of the 97 percent of companies that engage in this practice -- you're probably paying through the nose for your ignorance.

Let's Fix That

What do we know about how this system works? Not a lot.

Individual insurance companies hold information about their pricing practices close to the vest, calling their methods for setting rates trade secrets. Worse, according to Former Texas Insurance Commissioner Bob Hunter, now director of insurance at the D.C.-based Consumer Federation of America, "every insurance company uses this score differently."

But there are some general rules that appear to hold true across the industry.

FICO insurance underwriting expert Lamont Boyd tells InsuranceQuotes.com that just two factors make up about 70 percent of the credit-based insurance score that insurers use in setting their rates. Specifically:

• 30 percent of your score depends on "how much credit card and loan debt you have compared to how much you are allowed to borrow."
• Even more important, "40 percent of every consumer's bottom line score will be driven primarily by whether or not you paid your credit obligations on time."

Other inputs include length of credit history, collections, bankruptcies, and new applications for credit.

Knowledge Is Power

Knowing this, we can suggest a couple of simple rules that will -- if not necessarily protect you from this insurance industry practice -- at least help to minimize your risk of getting gouged.

• First rule: Don't max out your cards, and always make sure you have lots of credit available to you. That means not necessarily closing credit card accounts just because you don't need the cards anymore (which would decrease your available credit, even as it risks removing beneficial, long-held credit accounts). The key is to have a lot of cushion between the amount you actually owe and the ceiling on your credit limit.
• Second rule: Pay your bills on time.
• Extreme option: If all else fails, you could move to California, Hawaii, or Massachusetts. According to InsuranceQuotes.com, these three states are the only states that ban the practice of setting insurance rates based on credit ratings. (Although two of those states have other downsides: In a state-by-state rundown of most expensive average car insurance costs, California came at No. 7, and Hawaii at No. 15. But Massachusetts falls in the bottom third, price-wise, at No. 35.)

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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8 Car Insurance Myths You Should Send to the Junkyard

From the old fiction about red cars costing more to insure, to the one about rates dropping when you turn 25, to the idea that "full coverage" means you get a new car after a crash, myths about car insurance abound. And they're easy enough to take at face value -- until you look at the facts. Not falling for these eight insurance fables could save you some cash.

1. "Full coverage" will get me a new car if I crash. Your auto repair shop may thank you for having collision and comprehensive coverage, because they'll get paid by your insurer for fixing your car. But however you define "full" coverage, it won't equate to you getting a new car after you crash. Insurance is meant to put you back to where you were, not improve upon it, so you won't be getting a better car than you had.

If your car insurance agent tells you that you have "full coverage," ask what that entails. It could include liability, property damage and rental reimbursement, says Shane Fischer, an attorney in Winter Park, Fla. "Unfortunately, most people who claim to have 'full coverage' are people of modest incomes who buy the cheapest policy their state legally allows," he says. "This can leave them without uninsured motorist coverage if they're a victim of a hit and run, without a rental car if theirs is damaged in a crash or personally responsible for thousands in medical bills if they don't have enough liability coverage."

Full coverage isn't an insurance term agents use, says Adam Lyons, CEO of The Zebra, a digital auto insurance agency. Collision insurance covers damage to your vehicle in an accident. Comprehensive covers non-accident damage, such as from theft and fire. If you want medical coverage and other protections, you'll have to spell that out for your agent, Lyons says.

2. My rates will go up if I get a traffic ticket. Not always, says Matthew Neely, owner of Eco Insurance Group in Las Vegas. A client who has six speeding tickets in the past three years hasn't had his rate go up, he notes.

Here's how it works, Neely says: Some companies only ask for a record of an applicant's driving history when he or she first sign up for a policy. Motor Vehicle Reports cost $3 to $28, depending on the state. "These charges can get very expensive for insurance companies, so a lot of the time the carrier will randomly select households and run the MVRs," he says. "If you are lucky enough, the insurance company will not find out about your speeding habit. However, if you let your insurance lapse, get into an accident or change insurance carriers, the carrier will run the MVR."

3. Thieves prefer new or fancy cars. Not true, points out Lyons. Of the 10 most frequently stolen cars, the most stolen in 2012 was the 1996 Honda Accord, according to the National Insurance Crime Bureau. You might have the latest and fanciest car, but a 1996 Accord is preferable for catalytic converters and other parts that are more in demand. To protect your car against theft, get comprehensive insurance.

4. My red car will cost more to insure. False. Insurers don't care what color your car is and they don't ask for that information. Police might spot a speeding red car quicker than a white one, but an insurer factors in other aspects of your car, such as model, make, year and engine size.

5. The longer you are with an insurance company, the lower your rate will be. This is half true, Neely says. Longevity discounts are sometimes offered to policyholders, but it doesn't shelter them from increased costs, he says. "Most of the time, the moment you make a claim, this discount will disappear, and it does not guarantee your rate will not increase," Neely says.

6. My credit score has nothing to do with my car insurance rate. In most cases it's the biggest factor of determine your rate, right after your driving record, Neely says. Studies have shown that individuals with good credit get in fewer accidents, he says, though insurers in California, Hawaii and Massachusetts can's use credit as a rating factor.

7. No fault means I am not at fault. In most states "no fault" simply means that each insurance company involved pays for their respective policyholders injury-related bills, regardless of who is at fault, Neely says. This helps keep the overall cost of car insurance down.

8. Rates drop at age 25. Rating factors vary by state, but in North Carolina, the myth is wrong because age isn't a factor in pricing, says Jonathan Peele, president of Coastline Insurance Associates of North Carolina. Instead, insurers use the years of experience to determine the rate. Once the driver has more than three years of driving experience, the insurer can't surcharge the premium, he says. Less experienced drivers are charged more for car insurance because they have a higher risk.

A former newspaper journalist, Aaron Crowe is a freelance writer who specializes in personal finance, real estate and insurance for various websites, including Wisebread, insurance websites, MortgageLoan.com and AOL.

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Walmart Brings One-Stop Shopping to Car Insurance

The Associated Press

Apr 30th 2014 6:00AM

walmart.com/AP

By ANNE D'INNOCENZIO

NEW YORK -- Walmart (WMT) is bringing one-stop shopping to another area: auto insurance.

The world's largest retailer has teamed up with AutoInsurance.com to let shoppers quickly find and buy insurance policies online in real time to cut down costs.

The service is available immediately in eight states -- Arkansas, Louisiana, Mississippi, Missouri, Oklahoma, Pennsylvania, Tennessee and Texas. It will be available nationwide in the next few months.

Shoppers can go to autoinsurance.com or access the site through Walmart's website at www.walmart.com/autoinsurance.

AutoInsurance.com, a division of Fort Lee, N.J.-based Tranzutary Insurance Solutions, a licensed property and casualty insurance agency, was created after Walmart realized there was an opportunity for a quicker service where shoppers can buy and save on car insurance that provides the final price -- with no bait and switch tactics. Walmart says car insurance is among the biggest monthly expenses for customers, and for some, it can outpace health care costs.

In a Tuesday briefing with the media, Daniel Eckert, senior vice president of services for Walmart U.S., said the Bentonville, Ark.-based discounter will be AutoInsurance.com's exclusive retail partner and receive promotion payments in its role as marketer. AutoInsurance.com will earn a commission every time a policy is sold.

"Our customers too often have to settle for auto insurance policies that aren't the best fit and cost more than they want to spend," Eckert said.

The strategy marks Walmart's latest flirtation with insurance marketing and also highlights how the retailer is trying to use its size to expand beyond food and other staples into a one-stop shopping destination as it seeks to bring in more shoppers to its site and its stores. Walmart plans to promote the insurance shopping service in its stores.

Last month, Walmart introduced a new money transfer service that it says will cut fees for its low-income customers by up to 50 percent compared with similar services elsewhere. That service is being rolled out in partnership with Ria Money Transfer, a subsidiary of Euronet Worldwide (EEFT).

Joshua Kazam, founder of AutoInsurance.com and the founder and chairman of Tranzutary, noted that 90 percent of people compare prices online for products and services like airline tickets, but its survey shows that only one in five comparison-shop for auto insurance because it's a complicated process.

Walmart has had a relationship with Kazam, an entrepreneur, and his partners that dates back several years. For example, in 2009 Kazam and his team partnered with Walmart to bring PetArmor, a generic version of a popular flea and tick preventative treatment, to Walmart customers. Kazam founded Velcera, which created the PetArmor brand and was acquired last year by Perrigo (PRGO). But recently, Walmart has been working with Kazam in improving the experience related to insurance products.

In 2012, Walmart tested a program with Tranzutary to sell prepaid MetLife (MET) insurance policies in 217 stores in Georgia and South Carolina. Then last April, it launched a test program in Pennsylvania where customers who purchased policies from AutoInsurance.com reported annual savings on their insurance of $1,168, on average. At the same time, it displayed kiosks in Illinois where shoppers could pick up a saving card that offered a discount on a new auto insurance policy sold through Esurance.

Walmart decided that focusing on a price comparison service was the way to go.

It works this way: customers log on to the site and provide their name, address, date of birth and contact information. They can also have the site retrieve their current auto insurance policy, allowing AutoInsurance.com to automatically fill in the necessary coverage information for an apples-to-apples comparison. The free service offers customers multiple quotes from some of the leading national insurance carriers like Esurance, Safeco, and Progressive (PGR) within minutes.

Customers can choose to either purchase the policy online immediately, speak with a licensed agent at 800-700-7500 or save the information and purchase later.

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How to Insure Your Retirement Like You Do Your Car (Almost)

You can insure your home and car from disasters and accidents. Life insurance essentially protects your family from the loss of your income should tragedy strike. You can't insure your retirement accounts in the quite same way, but there are a few tried and true strategies that can safeguard them.

1. Continue Saving for Your Retirement Even During Your Golden Years

There is no rule that you have to stop investing when you hit your golden years. One of the best hedges to outliving your retirement assets is to continue investing even when you reach retirement age. While there are mandatory age distributions from 401(k) retirement plans and traditional IRAs, you can continue to make investments in other assets during your retirement.

"With increasing life expectancy and retirements that could last for decades, investing may be a necessity for many retirees, says J.J. Montanaro, a certified financial planner with USAA. "If you just look back at the last 30 years, a dollar has lost nearly 60 percent of its purchasing power to inflation. Investing offers a way to combat that loss of purchasing power. The key is to develop a plan that will allow you to achieve what you want to achieve without causing chronic insomnia."

2. Work Longer

While some Americans must continue to work during retirement because of a lack of savings, others simply want to work and enjoy the social aspect of working during retirement.

Mitch Anthony debunks the old concepts of retirement in "The New Retirementality." "A longer work life means continued engagement as well as continued paychecks," he says. "The day you cash your last paycheck, the price of everything begins to matter. Why enter a shrinking economic reality sooner than you need to?"

Retirement today looks very different than it did decades ago, and that isn't necessarily a bad thing. The real problem is getting over our preconceived notions as to what retirement means in today's economy and society.

3. Invest in Passive Income Strategies

Many financial experts believe that you need several buckets of income to supplement your retirement. For example, you could have a pension, income from real estate, Social Security and an annuity to help replace the income that you had before you retired.

"Typical retirement planning is that you work like a dog for 40 years, save up and spend from principle until you exhale your last breath," says Todd Tresidder, financial mentor and author of "How Much Money Do I Need To Retire" and other books. "If you flip that upside-down and -- rather than amassing a big pile of assets -- save assets that produce cash flow in excess of your expenses, we then eliminate risks. We create perpetual income."

Retirement is a euphemism for old-age financial independence. The core of financial independence using passive investments is that you create cash flow from investments that exceed your expenses and only spend the cash flow, not the principle balance. A passive income requires minimal input from you after you invest in it to start.

4. Invest in Annuities

An annuity is essentially an insurance product. You trade a lump sum for equal monthly or yearly payments when you invest in an annuity. For example, a $1 million lump sum payment to an insurance company could provide you with more than $40,000 in yearly payments for you and your heirs the rest of your lives. (Of course, details vary.)

Intro to Retirement

"Annuities shift risks from you to the insurance company," says Tresidder. "Retirement planning as it's commonly practiced today is nothing more than self-insurance, where you are accepting most of the risk. Using annuities shifts market risk, actuarial risk and longevity risks from you to the insurance company."

There are many benefits and several drawbacks to annuities. They may provide higher yields than traditional pension plans and other retirement options, but they also leave no assets for your heirs when you die.

5. Hedge Your Investments

My father-in-law retired after working as an executive for decades at a large, national bank. In addition to his pension, he held a lot of company stock that he received as options. After the financial crisis in 2008, his stock and dividends took a severe hit. The stock has recovered, but my in-laws endured several rocky years.

You can use option strategies to protect your stock positions in many cases. An option gives you the opportunity to sell or buy shares of stock with contracts at a future time at a set amount of money, instead of relying on the fluctuations of the market. If you don't feel comfortable with options, you can enlist a financial planner to hedge your retirement investments.

6. Get Professional Help

It never hurts to get professional financial help if you are worried about your retirement accounts and if you will have enough saved for retirement. It has never been easier to find qualified financial planning -- fee-only, commissioned-based, or even by the hour for giving advice without creating a financial plan.

Insurance companies do not offer retirement portfolio insurance, but there are ways that you can hedge against calamity with your retirement accounts.

Should there be insurance for your retirement accounts? Should insurance companies offer this type of insurance coverage just like they insure your car or home? Would you buy retirement insurance? 

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