What is Usage-Based Auto Insurance And How Does It Work?

Dec 27, 2020 | Personal Insurance

Have you heard about usage-based auto/car insurance and how it can help you to save money? How does this exactly work? In this article, we will discuss usage-based auto insurance and hopefully, this can help you decide whether to acquire or not avail this type of insurance.

If you were offered less expensive car insurance based on how safe you drive, will you take advantage of it? A lot of car insurance companies are now offering their customers more management over their auto insurance through usage-based insurance or UBI programs. This is where they can earn discounts on their premiums if we based on how safe they can drive.

Basically, if you’re a safe driver and you’re willing to prove it by having your insurance company monitor your driving habits, you will be able to save money on your car insurance.

Usage-based insurance or UBI is a newer kind of car or auto insurance that looks at other factors such as the number of miles you have driven or how safe is your driving in order to know your premium rates. For instance, if you usually drive only a few miles or only stick to a speed limit, you might qualify for a lower premium with usage-based insurance against normal car insurance.

This type of insurance was made available in the U.S. more than a decade ago and more than 8 million UBI policies were bought in the country in 2018 according to Ptolemus Consulting Group. UBI may or may not be for you depending on your driving habits.

So, what exactly is usage-based insurance, and what are its advantages for you? This article will discuss how this kind of auto insurance works, what the different kinds of insurance have, and which factors to consider if you’re planning to opt for usage-based insurance.

What is Usage-Based Insurance?

Usage-based insurance determines your premiums depending on how you technically drive instead of factors such as your age and the condition of your car. If you’re a safe driver or you don’t usually drive, you could get discounts or less expensive premiums.

Insurance companies use a telematics device such as a plug-in device or a mobile application in order to track your mileage and speed. Your usage-based insurance could have lower auto insurance rates if you drive safely.

Furthermore, usage-based auto insurance means “pay how you drive”. This is a way for insurance companies to determine your premium depending on how safe you drive. Technically, usage-based insurance has advantages for both you and your insurance company since it’s a plus for you if you adhere to safe driving habits. What’s more, is that people who don’t always drive and have safe driving habits usually also avoid getting into accidents leading to fewer claims. The actual goal of this usage-based coverage is to reward the insurer for your good driving habits or behavior with less expensive rates.

What Are The Types Of Usage-Based Car Insurance Policies?

There are two kinds. These are pay-how-you-drive and pay-per-mile. Insurance companies can determine how often or how safe you drive through a mobile app or through a plug-in device that tracks your car. Some insurance companies opt to only offer usage-based car insurance policies. Meanwhile, other major insurance companies usually offer it as a discount from your current policy.

Having car insurance safeguards you from paying directly out of your pocket for damages or injuries you can make with your car. Your insurance can also pay to repair or replace your vehicle when it’s damaged or lost due to a peril such as fire or hail damage.

The payment you give to keep your policy active or your premiums are determined by low or high the risk you have. Your car insurance company may give you lower premiums or may offer you a safe driver discount if you’re a good driver or you drive less often.

Normally, car insurance underwriters usually use statistics to check the risks based on how people like you with your characteristics and driving habits usually drive. They will usually base your car insurance rates on factors such as your age, credit score, driving history, the kind of vehicle you drive, etc.

However, in some car insurance companies, they offer policies or discount programs that determine your premiums on how you actually drive. This is what you call “usage-based insurance”. When you avail of this kind of insurance, your premiums will be lower the safer your drive. If you are a riskier driver, your premiums will be higher. Usage-based insurance can help save you money compared to availing normal premiums.

How does usage-based insurance work?

Technically, usage-based insurance is car insurance that calculates your premium depending on the actual usage of your car. If you’re not out there driving, you won’t be involved in any accidents.

However, not all insurance companies offer usage-based car insurance, and some only offer it as a discount program. Usage-based insurance is actually less used by consumers due to privacy issues since insurance companies need to track your driving.

Traditional car insurance companies may use different factors such as your age, location, and insurance score to identify your premium. As for usage-based insurance, it considers your driving habits to calculate how much you’ll pay for your coverage.

Usage-based insurance can be useful for both insurance companies and car owners. Responsible drivers can acquire lower premiums with usage-based insurance rather than acquiring traditional insurance. Meanwhile, insurance companies have an advantage by motivating their policyholders to be responsible drivers.

“How much you save depends on the plan and how you drive, naturally, but typically, you can reduce your rate by 10% to 30%,” says Penny Gusner, an analyst for Insurance.com and CarInsurance.com.

Having a usage-based insurance program, your insurance company will have to track your mileage and driving habits with telecommunication devices called telematics. The data that will be collected will be sent to your insurance company through a plug-in device, mobile app, or a device that is already installed in your car by the manufacturer.

Telematics uses cellular, GPS and other technology to collect information on how motorists drive, and tracks the time of day and vehicle speed, how many miles you drive and sudden changes in speed, or how often you brake hard or accelerate significantly,” Gusner says. “Some also track how much you idle. Still, others may also include “cornering” (how you take a corner) and phone use behind the wheel.”

The needed information that the insurance company will collect is based on the kind of usage-based insurance program they offer.

There Are Two Types Of Usage-Based Insurance Policies

Usage-based insurance has two categories. The first category is called pay-how-you-drive programs. This type of usage-based insurance monitors your driving behaviors such as mileage, the time of day you drive, and changes in speed. The second category is called pay-as-you-drive / PAYD / pay-as-you-go or pay-per-mile plans. This category only tracks how many miles you have driven.

Pay-how-you-drive or behavior-based: The rates for this usage-based insurance depends on how safe of a driver you are. If you are a safe driver, your rates will be lower than if you drive in high-risks.

Pay-per-mile or pay-as-you-drive: The rates for this usage-based insurance will depend solely on the number of miles you drive during the given policy period. If you drive less, your rates will be lower.

Usage-Based Insurance Programs That Track Driving Behaviors

Usage-based insurance programs that track your driving behavior will collect data for a specific period of time. They will usually collect until your next policy renewal to establish your habits and discount your premium if you qualify. Some insurance companies will give you an immediate discount of 5% to 10% when you acquire the program.

Usage-Based Insurance Programs That Track Mileage

Insurance companies will only often charge you a monthly base rate and a per-mile charge for usage-based insurance programs that track only mileage.

We suggest taking note that an insurance company’s usage-based insurance program details may differ in every state or may not be even available in selected areas.

Car insurance companies will ask you to report the needed information every policy period to monitor your driving behavior. They will use this information to adjust your rate when you renew your policy for another time. If the insurance company finds out that you have become a more responsible or less-frequent driver since the last time you renewed your policy, you may be given the chance to save up some money. 

Your insurance company may give you a telematics device to connect to a smartphone app when you decide to get a usage-based insurance program. The telematics device will be placed in your vehicle so it can collect your driving data. The smartphone app will then send it back to your insurance company. While some insurance companies only require a smartphone app for usage-based insurance programs due to advancements in technology. Using the GPS and other location-tracking features, the app will record and monitor your driving behavior while you’re traveling on the road without plugging any device into your car.

Different factors such as speed, vehicle usage, braking, acceleration, time of day, and other driving behaviors will be monitored through the telematics device and/or an app. After the insurance company observes your driving behavior, you may qualify for a discount on your car insurance premium all depending on how safely you drive.

Purchasing a usage-based car insurance policy or a traditional policy will wholly depend on your needs.

How Do I Report My Driving?

There are different ways of reporting your driving to the insurance company. This depends on what kinds of reporting options you may have.

Mobile App

Some insurance companies may offer a mobile app for your smartphone that acts as a GPS to record how much you drive. Using the app, you will be able to see your most recent trips, much you drove during them, and what time you were driving. If you drive less or you drive at less risky times like avoiding late nights on weekends can lead to a lower premium.

You may also be able to see certain hazards you made while driving such as using your phone, driving too fast, accelerating too quickly, or braking too hard. If the mobile app took too many of these records, your insurance premiums will most likely increase.

This mobile app may run in the background and can only be activated when it detects that you’re moving at a specific or certain speed.

Plug-in device

Your insurance company might provide you with a dongle or other connecting device that connects into your car’s on-board diagnostics port. Regarding the mobile app, the plug-in device also features a GPS system and takes note of all of your driving trips and any unsafe maneuvers you made while traveling.

You will be able to check all your logs of all your driving habits by logging onto your insurance company’s website.

Do Usage-Based Insurance Programs Save You Money?

Usage-based insurance programs are there to offer advantages to you since you’re in control after all. The discount will be huge if you’re a safe driver. Since you can also check your driving habits through your smartphone app, you could also see which areas you need to improve upon, and hopefully, you will receive a higher discount. You don’t also have to worry since you won’t be penalized if you do not have good driving habits.

What’s more, usage-based insurance programs are completely voluntary so you’re not really required to take part in the program and can choose to sign up for it anytime.

Which Insurance Companies Use Telematics?

Here is some little information regarding usage-based programs that are offered by some insurance companies.

  • Progressive Snapshot — this is a snapshot device or a mobile app that tracks your mileage, the time of day you drive, and how you drive.
  • State Farm Drive Safe & Save — this mobile app measures behaviors like acceleration, braking, cornering, speed and distracted driving.
  • Allstate Drivewise — tracks your speed, braking, and the time of day you drive to determine your cashback.
  • Nationwide SmartRide — measures miles driven, hard braking, acceleration, idle time, and night-time driving.
  • Travelers IntelliDrive — captures the time of day you drive along with your speed, acceleration, and braking.
  • Esurance DriveSense — measures a range of driving behaviors such as miles driven at high speeds, hard braking, and major speed changes.
  • Metromile — uses a base rate and the number of miles you’ve driven to determine how much you pay for coverage each month.

Should I Get Usage-Based Insurance?

Here are some different factors that can help you decide if a usage-based insurance program might be right for you.

  • Consider Your Driving Habits

If you’re a good and safe driver, you will be able to get a lower premium with a usage-based insurance program. You may also save some money if you’ve made one or more previous accident claims. Usage-based insurance plans measure driving in real-time using telematics and may not rely on your driving record.

When looking for a usage-based insurance policy, check all the factors each company checks and weigh them against your driving behavior. For instance, if you drive during the night time for a late-shift job, you may not be able to save money with a usage-based insurance plan that measures the time of day that you’re driving since some companies consider daytime driving to be safer.

  • Consider How Comfortable You Are With Data Collection

Since insurance companies will collect data from you, you should also consider whether you’re willing to trade possibly lower car insurance premiums for privacy. Having your information taken such as your driving habits, mileage and phone use monitored may or may not be worth the possible savings for you.

Before you acquire a usage-based insurance program, Gusner advises that you must know exactly what the plan monitors and who the company shares the data with.

What’s Next?

If you’re a responsible driver or you work remotely, we greatly suggest to take a short commute or just don’t drive much. Usage-based insurance can help decrease your car insurance rates.

Make sure to check and weigh each of your options and compare programs to understand what data the insurance company will collect and how much you could possibly save and how the program works in your area.

Ask Us Any Questions

Now that you have knowledge regarding usage-based auto/car insurance, kindly don’t hesitate to ask us any questions or clarifications for things that are unclear to you. We hope we’re able to help you with this written article about usage-based auto insurance. Don’t forget to call or email us if you have any questions in mind. Please also don’t hesitate to check our other articles about auto insurance. Much useful information can also be found on our website. Have a great day and we hope you learned something new!