Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that exis...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Aug 20, 2020

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Things to Remember...

  • It’s plain to see that most insurance companies would go out of business if they didn’t structure their rates and policies in the ways they do
  • State regulations play a large role in figuring insurance rates for individual drivers. For example, the foundation of any auto insurance policy is built on the minimum amount of coverage state law requires a driver to carry
  • The simple fact that different states require different amounts of minimum coverage automatically means that the base rate will vary from one state to the next
  • Insurance companies take population density into consideration when figuring out individual rates. The higher the population density, the higher the risk of an accident
  • In states that typically have high taxation rates, you can assume your auto insurance rates will also be higher. In states that collect lower taxes, you will find cheaper state auto insurance rates. (Wondering which states have the cheapest auto insurance? Check out our piece on cheap auto insurance by state.)

If you’ve recently moved to a new state and have been forced to purchase new car insurance, you may be wondering why auto insurance rates vary so much per state.

But rest assured that the different rates have little to do with greedy car insurance companies trying to take advantage of drivers.

In our current cultural and political climate, it’s easy for consumer advocates and others to point to businesses and accused them of charging too much for goods and services. This is true for auto insurance companies just as with any other business.

But when you get past all the rhetoric and look at the nuts and bolts of an insurance policy, it’s plain to see that most insurance companies would go out of business if they didn’t structure their rates and policies in the ways they do. That’s just the reality.

Enter your zip code above to compare auto insurance rates now!

What do state regulations have to do with it?

State regulations play a large role in figuring insurance rates for individual drivers. For example, the foundation of any auto insurance policy is built on the minimum amount of coverage state law requires a driver to carry.

As a general rule, most states require coverage for bodily injury incurred by you, your passengers, or occupants of another car, and coverage for damage to any private property involved. Many states also require coverage for uninsured/underinsured drivers.

The simple fact that different states require different amounts of minimum coverage automatically means that the base rate will vary from one state to the next.

In states with higher minimums, like Alaska and Maine, the basic rate will be higher before you even begin to add on the extras.

Other state regulations covering things like age restrictions, classification of licenses, and motor vehicle traffic law are also contributing factors.

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Enter your ZIP code below to view companies that have cheap auto insurance rates.

 Secured with SHA-256 Encryption

Why is auto insurance cheaper in some Midwestern states?

Believe it or not, auto insurance in some Midwestern states with low population density can cost significantly less than other states with high population densities. When you stop and think about how insurance policies are structured, this makes a lot of sense.

To help you understand what’s going on here, let me ask you a question. When you go out Christmas or holiday shopping next November, will you be more likely to bump into someone in a crowded store or an empty one?

Obviously, your chances are greater the more crowded the stores are. Now, let’s apply that to auto insurance. The more densely populated a given area is, the greater your chances are of having a car accident.

That means in a small, heavily populated state like New Jersey, there are a lot more drivers on the road than there are in a less populated state like Wyoming.

Insurance companies take population density into consideration when figuring out individual rates. The higher the population density, the higher the risk of an accident.

Since auto insurance is all about risk from the standpoint of the insurance company, most of them have developed a formula based upon statistics that are updated at least annually; sometimes even semi-annually or even monthly.

So accurate are these formulas that many insurance companies can predict, with regularity, how many of their customers in a given state will file an accident claim. And in densely populated states where that number is disproportionately high, insurance will cost more.

Do states tax auto insurance policies?

One of the final pieces of the puzzle has to do with state taxation of auto insurance policies. Now, as far as our research indicates, there is no state that openly taxes auto insurance policies outright. But that doesn’t mean they don’t tax them at all.

In fact, most of them do in some form, usually referring to the taxes as surcharges or fees. For example, New York State assesses several different surcharges that are ostensibly dedicated to funding various driving-related expenses.

But no matter what you call it, it’s still money out of your pocket.

Just like our discussion regarding minimum coverage requirements, fees and surcharges vary from one state to the next.

In states that typically have high taxation rates you can assume your auto insurance rates will also be higher. In states that collect lower taxes, you will find cheaper state auto insurance rates.

If you’re planning a move to a new state, you can start looking for auto insurance rates now by entering your zip code below!

References:

  1. http://www.naic.org/state_web_map.htm
  2. https://www.farmers.com/auto/coverage/
  3. https://www.geico.com/claims/after-an-accident/
  4. http://www.reviews.com/auto-insurance/
  5. http://www.dfs.ny.gov/consumer/auto/auto1216.htm