3 Facts About Usage-Based Car Insurance That Can Save Money
Laura covers what usage-based car insurance is and three facts to know that can save you money. Learn the major pros and cons and how making a change in could drive down your car insurance rate.
I received a question from Gabrielle L. who says, “I love listening to your podcasts! Can I suggest a topic on how to save money on auto insurance? Many companies have usage-based technology or apps that reward safe drivers. I think this would be a great fit for Money Girl listeners.”
Thanks for your suggestion, Gabrielle! I’ve written and talked before about auto insurance, but it’s been a few years, so it’s a great time to review the topic.
The technology behind car insurance is getting more sophisticated. However, most consumers aren’t sure how the new programs work, the potential downsides, or how much money they could potentially save.
In this post, I’ll cover what usage-based car insurance is and 3 facts you should know. You’ll learn the major pros and cons and how making a change could drive down your car insurance rate.
Free Resource: Laura’s Recommended Tools—use them to earn more, save more, and accomplish more with your money!
What Is Usage-Based Insurance (UBI)?
The most advanced car insurance programs go by several different names, such as:
- telematics (a hybrid of telecommunications and informatics)
- pay-as-you-drive insurance
- pay-how-you-drive insurance
- pay-as-you-go-insurance
- mile-based insurance
- distance-based insurance
- usage-based insurance (UBI)
No matter what insurance companies call them the idea is that you can voluntarily opt to pay premiums based on collected data that shows how you drive. The safer you appear to an insurer, the less you’ll pay.
UBI programs are offered by top carriers such as Progressive, Allstate, State Farm, Nationwide, The Hartford, Liberty Mutual, GMAC, and Travelers. Some insurers can enroll consumers in all 50 states, but most companies offer UBI in fewer states.
Each insurer’s UBI program is different. Some only track mileage using self-reported odometer readings, existing in-vehicle equipment, or an on-board communication system, like OnStar. The idea is that the more you drive, the more likely you are to get into an accident and file an insurance claim. So drivers who are on the road less get bigger discounts.
Other programs monitor mileage in addition to certain driving behaviors such as how fast you drive, how hard you hit the brakes, where you drive, and the times of day you drive. Data is typically tracked by a small device provided by the insurer that you plug into a port under the dashboard. You might be required to keep the device in the car for just a temporary period while your rate is set, or you may need to keep it permanently in order to be eligible for discounts.
If you stay within safe ranges set by the insurance company, you’ll qualify for lower rates. For instance, if you drive less than 10,000 miles per year, never exceed 80 mph, and rarely drive after midnight, you’ll pay less than a driver with high miles and a lead foot.
See also: Millennials Most Likely to Use Pay-As-You-Drive Insurance Programs
What Are the Advantages of Usage-Based Insurance (UBI)?
The major advantage of enrolling in a UBI program is that the rate you pay is influenced more by your current driving behavior and less on your personal characteristics, past driving record, and aggregated driver statistics.
With traditional auto insurance, the rates you pay are largely based on personal characteristics that you can’t change, such as your:
- age
- gender
- marital status
- credit rating
- years of driving experience
There are a few states that prohibit or limit how insurance companies can use this information to set rates. Additionally, other factors like your driving record, ZIP code, vehicle type, previous claims, amount of coverage, and deductibles also affect your car insurance rate.
The major advantage of enrolling in a UBI program is that the rate you pay is influenced more by your current driving behavior and less on your personal characteristics, past driving record, and aggregated driver statistics.
That means UBI programs level the playing field and charge based on how you drive, rather than on factors that are partially or completely out of your control. It can make car insurance more affordable for those who typically pay the most, like young, single, males and anyone with poor credit.
UBI programs allow you to take control of your auto insurance costs by adhering to safe driving habits and reducing the miles you drive. Having a telematics device in your car also helps insurers reduce fraud by analyzing driving data like speed, time of day, and braking pressure associated with a car insurance claim.
Tracking devices can also monitor driver safety and reduce the frequency of theft by allowing stolen vehicles to be located quickly and recovered. All of these benefits allow insurers to cut costs and pass along a percentage of the savings to policyholders.
Drivers might save 40% or more off standard rates—not too shabby! These financial incentives also have wide-reaching benefits for society, like reducing accidents, diminishing congestion on highways, and cutting vehicle emissions.
See also: The Truth About Credit and Insurance Rates
What Are the Disadvantages of Usage-Based Insurance (UBI)?
All of the advantages of UBI programs sound great—so what’s the downside? Tracking driving behavior has raised privacy concerns. Many drivers don’t like the idea of having their whereabouts monitored, worry their data could be misused, or wonder if they’ll overpay for insurance if they misbehave behind the wheel.
While sharing personal information isn’t for everyone, it’s become the norm as devices such as smartphones and GPS devices have gone mainstream. The reality is that carrying a smartphone reveals much more about where you go and what you do than a telematics device in your car.
Read a study from the Center for Insurance Policy and Research, Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implicationsopens PDF file to learn more.
3 Usage-Based Insurance Facts That Can Save You Money
If you’re willing to give up information about your driving behavior, it can certainly cut the cost of auto insurance.
If you’re willing to give up information about your driving behavior, it can certainly cut the cost of auto insurance. Here are 3 facts to help you understand if it’s worth switching from a traditional policy to a UBI program:
Fact #1: Poor driving won’t cause your rate to rise
One of the most common concerns consumers raise about enrolling in a UBI program is having to pay more if they don’t drive perfectly. Most insurers claim that rates won’t go up if you’re not the best driver—you simply won’t get a safe driver discount.
The only situation where you might see a rate increase is if you claim to be a low-mileage driver, but then log miles over that amount annually. So be sure to estimate your mileage as closely as possible.
Fact #2: You can still speed (within reason)
As I previously mentioned, some UBI programs don’t monitor vehicle speed as a factor in giving you a discount. But even those that do, such as Allstate’s Drivewise program, only ding you for driving over 80 mph.
None of the programs compare how fast you’re driving against the posted speed limits. For instance, you don’t lose a discount for driving 65 mph in a 55 mph zone. Insurers simply calculate the percentage of miles you log at excessive speeds.
And if you do slip up and exceed the insurance company’s recommended limit, remember that your rate won’t go up—you may just get a smaller discount.
Fact #3: Getting a full discount may take time
Different insurance companies handle UBI discounts differently. Some may offer a small signup incentive, such as a 10% discount, and then apply the full savings at renewal time, which is usually every 6 months.
Progressive’s Snapshot program lets you sign up for a 30-day trial where you install their telematics device. After logging 30 driving days, you get an estimate for how much you can save and the discount is applied to your premium. After 6 months with the device, your permanent discount is applied and you return the device to Progressive. Allstate’s Drivewise program continues to provide discounts to safe drivers as long as you keep their device permanently installed in your vehicle.
How Much Is a Usage-Based Insurance Discount?
You’re probably wondering how much a typical UBI program could save you. State Farm’s Drive Safe & Save program is available to policyholders with an onboard communication system (like OnStar, In-Drive, or SYNC) or using a mobile app on your smartphone. They say you can save up to 50%.
GMAC Insurance offers a usage-based program that’s offered to OnStar subscribers. Their Low-Mileage Discount rewards policyholders who drive less than 15,000 miles per year 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.
Get More Money Girl!
Want to know the best financial and productivity tools that I use and recommend to save time and money? Click here to check out 40+ tools I recommend!
To connect on social media, you’ll find Money Girl on Facebook, Twitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on iTunes or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web.
Click here to subscribe to the weekly Money Girl audio podcast—it’s FREE!
There’s a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:
- Dominate Your Dollars – Laura’s private Facebook Group
- Money Girl on Facebook
- Laura on Facebook
- Google+
- Money Girl podcast on iTunes (it’s free to subscribe!)
- Money Girl on the Stitcher app (also free to subscribe!)
- Email: LauraDAdams contact
Click here to sign up for the free Money Girl Newsletter!
Download FREE chapters of Money Girl’s Smart Moves to Grow Rich
To learn about how to get out of debt, save money, and build wealth, get a copy of my award-winning book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite bookstore as a paperback or e-book. Click here to download 2 FREE book chapters now!
You May Also Like…
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.
