Why Does Your ZIP Code Matter So Much for Auto Insurance Rates?
Last Updated on May 21, 2020
Some drivers are surprised to learn that ZIP codes impact auto insurance rates.
It’s true: your ZIP code has a significant effect on your car insurance premiums. Why does your ZIP code matter so much for rates? Today, we’re explaining everything you need to know about how your ZIP code affects auto insurance rates.
Factors that Impact Car Insurance Rates
Your ZIP code is one of the dozens of factors that impact car insurance premiums. Some of the factors that play a crucial role in auto insurance premiums include:
- Age
- Gender
- Driving record
- Years of driving experience
- Claims history
- Credit history
- Vehicle type
- Miles driven annually
- ZIP code and geographic location
- Vehicle use
- Coverage limits and deductibles
These factors are weighted differently. Driving record tends to play a more significant role on premiums than, say, vehicle type.
Some states forbid insurers from using certain factors. Insurance companies in California, Hawaii, and Massachusetts, for example, cannot use credit scores to discriminate between drivers.
Insurance companies in most states, however, will happily use your ZIP code or geographic location to influence your car insurance rates.
How Does Location or ZIP Code Impact Insurance Premiums?
Many insurance companies have base rates for certain ZIP codes. Insurance companies will start with this base rate, then add to your premiums based on the factors above.
A driver who lives in a highly-populated, congested metro area may pay higher rates for car insurance than a driver living in the less-congested suburbs. The congested area has a higher accident rate, and the driver is more likely to make a claim.
Similarly, drivers who live in ZIP codes with high crime rates may pay higher rates for car insurance. Comprehensive coverage, which covers theft, vandalism, and other damage, may be significantly higher in certain ZIP codes compared to others.
Insurance companies will check the number of cars that have been recently stolen in your area. They will also check the rate of vandalism, break-ins, hit-and-runs, accidents, and other incidents.
Certain ZIP codes are also associated with higher rates of insurance fraud. Drivers may fabricate hit-and-runs or exaggerate bodily injury claims to increase compensation, for example.
Or, some ZIP codes have higher rates of weather-related incidents. If you live in a flood zone or a neighborhood with high fire risk, for example, then you might be more likely to make a claim.
Typically, drivers living in rural areas pay lower rates for car insurance than drivers living in urban areas. There are fewer people in rural areas; there’s less traffic; and there aren’t as many collisions, claims, or accidents. However, this isn’t always true: some rural areas in America have significantly higher rates of crime than nearby urban areas.
To get an idea of how auto insurance rates can differ across different parts of the country, view the two charts below.
Zip Codes With Highest Auto Insurance Premiums in the Country
| Rank | Zip Code | City, State | Average Yearly Rates |
|---|---|---|---|
| 1 | 48227 | Detroit, Michigan | $5,109 |
| 2 | 11226 | New York, New York | $3,877 |
| 3 | 19132 | Philadelphia, Pennsylvania | $2,760 |
| 4 | 02903 | Providence, Rhode Island | $2,749 |
| 5 | 70117 | New Orleans, Louisiana | $2,542 |
| 6 | 90029 | Los Angeles, California | $2,416 |
| 7 | 06525 | Woodbridge, Connecticut | $2,291 |
| 8 | 21216 | Baltimore, Maryland | $2,256 |
| 9 | 33142 | Miami, Florida | $2,248 |
| 10 | 41464 | Royalton, Kentucky | $2,104 |
Zip Codes With Lowest Auto Insurance Premiums in the Country
| Rank | Zip Code | City, State | Average Yearly Rates |
|---|---|---|---|
| 1 | 44836 | Green Springs, Ohio | $647 |
| 2 | 11226 | Arden, North Carolina | $671 |
| 3 | 04072 | Saco, Maine | $709 |
| 4 | 24073 | Christiansburg, Virginia | $751 |
| 5 | 83706 | Boise, Idaho | $753 |
| 6 | 86403 | Lake Havasu City, Arizona | $769 |
| 7 | 47907 | West Lafayette, Indiana | $770 |
| 8 | 54302 | Allouez, Wisconsin | $776 |
| 9 | 03303 | Concord, New Hampshire | $785 |
| 10 | 61761 | Normal, Illinois | $827 |
Why Location Impacts Insurance Premiums
Here are some of the reasons why location impacts insurance premiums:
Higher Accident Rates: Crowded, congested urban areas tend to have higher accident rates than less-populated suburban areas.
Higher Vehicle Theft Rates: Some ZIP codes are associated with higher rates of vehicle theft than others, increasing the chances that the insurer will need to make a total loss insurance claim.
Higher Break-in or Vandalism Rates: If you live in a neighborhood with high rates of break-ins or vandalism, then you may pay more for car insurance than someone who lives in a safer ZIP code.
Greater Risk of Environmental Damage: Some areas have a higher risk of hail damage. Other areas regularly experience winter weather that can worsen driving conditions. Some ZIP codes have tornadoes or hurricanes and others do not. When weather impacts claim rates, the weather in your ZIP code can also impact insurance premiums.
Higher Rate of Insurance Fraud: Certain ZIP codes are associated with a higher rate of insurance fraud than other ZIP codes. Insurance fraud costs insurers billions of dollars every year, and they will raise insurance premiums to compensate.
Your Neighbors: It’s not just your ZIP code that impacts insurance premiums; it’s your neighbors within that ZIP code. Your ZIP code may have higher rates of fraudulent injury claims, for example, or higher rates of break-ins and vandalism. A handful of bad neighbors could significantly raise insurance premiums in a specific ZIP code.
Using ZIP Codes to Calculate Insurance Premiums is Controversial
Using ZIP codes to calculate car insurance premiums has always been controversial.
The controversy reached a peak in the 1960s when insurance companies were accused of racially discriminating against customers in certain ZIP codes.
ZIP codes with predominantly African-American populations, for example, paid significantly higher rates for car insurance than ZIP codes with other demographics. Insurance companies would draw a “red line” around certain ZIP codes and prohibit agents from selling car insurance within those communities – even if those ZIP codes had similar accident rates and claims rates to other neighborhoods.
Even today, minority neighborhoods tend to pay higher car insurance premiums. A report published by ProPublica and Consumer Reports in 2017 concluded that “minority neighborhoods pay higher car insurance premiums than white areas with the same risk.” Researchers looked at insurance companies in California, Illinois, Texas, and Missouri and found that drivers in minority neighborhoods pay up to 30% more than drivers in mostly-white neighborhoods.
Not All States Allow Insurers to Use your ZIP Code for Premiums
The redlining controversy has led some states to ban location-based insurance premiums.
Insurers in California, for example, are only allowed to calculate insurance rates based on your driving record, annual mileage, and years of experience before considering your geographic location. Insurers cannot use your ZIP code as a “base rate” to begin with.
In most states, however, insurers will happily use your ZIP code to calculate insurance premiums.
Lower Your Insurance Rates by Parking in a Private Garage
You might live in a tough ZIP code, but that doesn’t mean you have to pay high rates for car insurance.
One way to reduce the cost of car insurance in a tough ZIP code is to park your car in a private, locked garage at night. Insurance companies may give you a discount because your car is significantly less likely to be damaged than if it were parked on the street.
Typically, your garage needs four walls to qualify for this discount. However, some insurance companies will bend the rules if you have, say, three walls and a locked gate or another security device.
Final Word
Your ZIP codes plays a crucial role in insurance premiums. Fortunately, you can compare quotes online today to ensure you pay the lowest possible rates for car insurance in any ZIP code.
