5 Ways Taxes Affect Your Car Insurance

Photo: Martin Haesemeyer

It’s no secret that taxes can and do affect nearly every aspect of our lives, from how much of our income we surrender to the amount we spend when making a purchase on the Internet. It should be no secret then that, even though we don’t pay taxes on car insurance, this type of coverage could be affected by taxes. Let’s take a closer look at the abstract ways that taxes can impact auto insurance.

Tax Liens Lower Credit Scores

If you’ve ever been hit with a tax lien because you failed to pay taxes on specific property or even income taxes, the debt you owe can hit you pretty hard. But did you know that by the time your tax lien hits your credit, your car insurance could also be negatively affected?

A tax lien can very possibly have a disastrous effect on your credit. Falling into a similar category as a bankruptcy or foreclosure, the lien can remain on your report for as long as 10 years if unpaid and 7 years if you’ve paid the debt off.

The lien can drop your credit score as many as 100 points. So since insurance companies either look directly at your credit score or look up your insurance score (which incorporates the credit score) to determine your level of risk as an insured driver, if you have a tax lien on your credit, you will be viewed as a risky driver and your insurance rates will likely increase.

Sales Tax Is Incorporated in Total Loss Settlements

One thing that many drivers don’t know is that car insurance companies often times reimburse drivers for the sales tax on their cars if they total them. In fact, 32 states are currently required to pay for the sales tax to replace a crashed vehicle in a total loss settlement.

This is a great help to those who will have to replace their cars after an accident. The only problem is that accidents often raise car insurance rates—especially if the car has to be totaled out.

While the tax may not directly affect car insurance rates in this case, the fact that the company has to pay it in addition to the total cost of a car for replacement could indeed result in the company choosing to increase rates.

Unless a driver is protected with some form of accident forgiveness, it’s very possible that sales tax could impact insurance rates.

Fraud Tax Is Included in Rates

In Florida, an increase in insurance rates known as “fraud tax” could have a definite effect on insurance rates. The tax stems from the rampant increase in fraudulent insurance claims by drivers in Florida, which in 2008 alone, totaled nearly $1 billion.

To compensate for the increasing number of clams, many insurance companies are adding as much as $100 to annual coverage. While there is no official name to the increase in rates in the state, the Insurance Information Institute has labeled it fraud tax.

Insurance Companies Pay Taxes

As mentioned previously, car insurance companies do not add taxes to annual premiums. However, the companies are required to pay taxes because they are business entities. Of course, as tax liabilities increase for insurers, they have to find a way to combat costs. As a result, an increase in taxes could very well pass down to an increase in insurance rates for customers.

Typically, taxes don’t have a direct effect on your car insurance because they aren’t attached to rates. But as you can see, depending on the circumstance, taxes could indeed make a difference in the amount you pay for coverage. So if you are looking to cut costs on your coverage, it’s good to think about how taxes affect them. You never know, with some creativity, you may be able to save some money.

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