Can Pay-As-You-Drive Insurance Save You Money?
Find out how pay-as-you-drive insurance works, which companies offer it, and if enrolling could be a smart move for your finances.
Laura Adams, MBA
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Can Pay-As-You-Drive Insurance Save You Money?
Would you be willing to install a little gizmo in your car that tracks how you drive, if it could save you money on car insurance? More insurers are offering this technology—but, so far, consumers aren’t beating down their doors for it.
In this episode I’ll tell you how pay-as-you-drive insurance works, which companies offer it, and whether enrolling in one of these insurance programs could be a smart move for your finances..
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What Is Pay-As-You-Drive (PAYD) Car Insurance?
Pay-as-you-drive (PAYD) insurance goes by different names, such as:
· usage-based insurance
· mile-based auto insurance
· telematics (a hybrid of telecommunications and informatics)
No matter what it’s called, the purpose is to set auto insurance rates based on your actual driving behavior instead of historical data and demographics, such as your credit, age, and gender. The idea is to reward safe drivers by charging them less.
Telematics technology makes it possible for an insurer to see exactly how skilled a driver is–except in a few states. Alaska, California, Hawaii, Indiana, North Carolina, and Tennessee, generally don’t allow carriers to use telematics to offer car insurance discounts.
When you enroll in most pay-as-you-drive programs, the insurance company sends you a small device that typically plugs in somewhere underneath your steering wheel. Other programs may work with existing vehicle techology, such as OnStar.
Data about how you drive is sent to your insurance company so they can assess your risk and set your rate.
What Does a Telematics Device for Car Insurance Track?
So, what can a telematics device track? Well, these electronic spies can collect a wide variety of information about you and your vehicle, such as:
how many miles you drive- the speed you drive
- the times of day you drive
- how much time you spend driving
- how hard you hit the brakes
- how fast you make turns
how many miles you driveAdvantages of Pay-As-You-Drive (PAYD) Car Insurance
The major advantage of usage-based insurance programs is that the best drivers might save 40% or more off standard rates. And some companies give you as much as 25% off, just for enrolling in their usage-based program. I’ll tell you which insurers offer them in a moment.
Drivers who probably have the most to gain are those who are paying high rates because they’re young, have a sketchy driving history, or even have a low credit-based insurance score.
Some proponents of telematics say these insurance programs could improve our driving standards when they eventually catch on with more consumers. They figure poor drivers will shape up so they can cut their auto insurance costs. Maybe more drivers will opt for public transportation instead, to reduce annual miles driven.
Some devices can be made to beep at you when you drive too fast, hit the brakes too hard, or even alert emergency services after a crash or theft. You may be able to go online or receive reports to see how well you’re driving.
Disadvantages of Pay-As-You-Drive (PAYD) Car Insurance
Drivers who probably have the most to gain are those who are paying high rates because they’re young, have a sketchy driving history, or even have a low credit-based insurance score.
The disadvantage of usage-based insurance programs is Big Brother privacy concerns. Many people worry about the implications of being tracked or having their data shared.
Different insurers track and evaluate different information. But most pay-as-you-drive programs say their devices don’t have GPS, and therefore can’t track you.
However, studies have shown that an insurer could estimate your location using other data, like the time, your speed, turns made, home address, and distance driven. So perhaps there’s a false sense of privacy. But smartphones are another type of device that track much more information than most realize, and that hasn’t cut down on their use.
For some pay-as-you-drive-programs, the telematics device only stays plugged into your vehicle for a short period of time, such as 6 months, and then you can remove it. That’s enough time for the insurer to get a valid snapshot of your driving patterns and set your permanent rate. In fact, that’s why Progressive’s program is named Snapshot.
Insurers that Offer Pay-As-You Drive (PAYD) Car Insurance
Progressive is just one of several top insurers that offer a pay-as-you-drive program. But they’re leading the pack with over 1.5 million drivers enrolled. They’re watching 3 main driving behaviors: how many miles you drive, how often you drive between midnight and 4:00 am, and how often you slam on the brakes. If you’re deemed a good driver, your savings could start as soon as 30 days after enrollment.
Allstate’s pay-as-you-drive program, called Drivewise, is only available in 22 states. It rewards you for driving low miles at safe speeds, and avoiding hard stops and driving during the early morning hours. It continues to provide feedback to users as long as you keep the Drivewise device installed in your vehicle.
State Farm’s Drive Safe & Save program is available to policyholders with OnStar, In-Drive, or SYNC communication services. It collects information about your driving through those technologies and can save you up to 50%.
GMAC Insurance offers a usage-based program that’s offered to OnStar subscribers in 35 states. Their Low-Mileage Discount rewards policyholders who drive less than 15,000 miles per years with a discount of up to 54% based on the number of miles driven. It doesn’t factor in any other driving behaviors besides mileage.
Despite privacy concerns, the market for pay-as-you-drive insurance programs is starting to heat up. Insurers like getting data that helps them filter out and reward low-risk customers. And consumers love having more ways to get personalized discounts, cut their insurance costs, and keep more of their hard-earned money.
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3D Auto Insurance Text and car driving images courtesty of Shutterstock.
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.