If you exhibit driving behaviors that lower your risk of filing a claim, the insurer may reduce your policy rates. But if you exhibit riskier behavior, you might not see any savings, and some insurers might even raise your prices.
What Is Usage-Based Insurance and How Does It Work?
Usage-based insurance is offered by many major insurers in the U.S. to both new and existing customers. It uses your driving habits and behavior to determine your rates, combined with traditional pricing factors like your driving record, the type of vehicle you have, where you live, and more.
The insurer uses technology known as telematics, such as a smartphone app or a device installed on your vehicle, to track your behavior behind the wheel. Once you sign up, the insurance company will need to collect data for a certain amount of time before it can determine your new rates.
“Many insurers use telematics apps or devices that are installed in your car, your smartphone, or your car’s built-in connectivity system to collect driving data. They typically monitor mileage, speed, acceleration, braking, cornering, time of day you drive, and sometimes phone use while driving,” says Scott Holeman, director of media relations at the Insurance Information Institute.
Some insurers also offer pay-per mile programs that solely track the distance you drive. The insurer charges you a flat rate for your auto coverage, then adds on an additional per-mile rate based on your actual mileage.
How Much Money Can You Save with Usage-Based Insurance?
The biggest advantage of usage-based insurance is the potential savings you can get with safe driving habits, low mileage, and other factors that lower your risk of filing a claim. The amount you can save depends on these factors and the insurer’s program. Some insurers offer a discount just for signing up:
Insurer | Program name | Sign-up discount | Discount range |
Drive Safe & Save | 10% | Up to 30% | |
Snapshot | Yes | Varies | |
DriveEasy | No | Varies | |
Drivewise | Yes | Varies | |
SafePilot | 10% | Up to 30% | |
Signal | Yes | Varies | |
RightTrack | Up to 15% | Up to 30% | |
Travelers | IntelliDrive | Yes | Up to 30% |
AAADrive | Up to 5% | Up to 25% | |
American Family Insurance | DriveMyWay | 15% | Up to 35% |
“Users of this type of insurance may be able to save money if they drive safely and/or less frequently. Discounts have been reported to be between 10-40% on premiums. But drivers who exhibit risky habits likely won’t,” says Holeman.
What Are the Other Benefits of Usage-Based Insurance?
There are a few other potential benefits of usage-based insurance, including:
Promoting safer driving habits. When your car insurance premiums are tied to your driving behavior, you may become more aware of your actions behind the wheel. You might drive safer, drive less, or drive during less risky times of day.
Accident reconstruction. Having a tracker in your car can help with accident reconstruction, because it provides a record of events leading up to and during an accident. This can help insurers determine accident fault and liablity, and expedite insurance claims.
“In my line of work at Shoreline Public Adjusters, we work with car insurance claims all the time. The bigger trend we have been seeing is that these insurers are leaning more on telematics data not just for pricing but for assessing risk and claim negotiation,” says Jordan Blake, director of communications and operations at Shoreline Public Adjusters, LLC.
What Can You Do to Save with Usage-Based Insurance?
While you may earn an immediate sign-up discount when you enroll in a usage-based insurance program, your insurer will need to track your driving behavior for at least a few months to set your new rates. Practice the following behaviors to maximize the potential savings:
Drive less. The less time you spend behind the wheel, the better. Look for options like public transportation, carpooling, and bicycling to put fewer miles on your vehicle.
Drive cautiously. Maintain a safe speed, avoid sudden bursts of acceleration and slamming on the brakes, and don’t take fast turns around corners.
Avoid late night driving. Some insurers view certain times of day, such as late at night whent there’s lower visibility, as more risky. Avoid driving at these times.
Avoid congestion. Try to avoid heavily trafficked areas and congestion when you can. Spending a lot of time idling in traffic jams can increase your risk level.
Stay off your phone. Some insurers track if you use your phone while behind the wheel. Since distracted driving can increase your chances of getting into an accident, avoid looking at your phone.
“I tried out one of the usage based car insurance programs earlier this year. The company used an app that tracked my mileage, braking, acceleration, speed, and the time of day I was on the road. About 90 days in, I was seeing a 10-12% discount. I was told that this discount stayed as long as my driving scores stayed strong.” says Blake.
Downsides of Usage-Based Insurance?
There are some downsides and risks to usage-based car insurance:
Potential for higher rates. Usage-based insurance only benefits you if you save money. But if you put a lot of miles on your car, drive aggressively, check your phone during your trip, or drive during riskier times of day, you may not see any savings. In fact, some companies may even increase your rates based on your driving data.
Privacy concerns. Some drivers may have justifiable concerns giving insurers access to data about their vehicle, driving behaviors, and location. Your personal information could be at risk in the event of a data breach, and some companies may even sell your data to a third party or a data broker.
“Insurance rates can increase if you routinely drive in heavy traffic or during nighttime hours because these conditions are statistically linked to a higher risk of accidents. Heavy traffic increases the likelihood of collisions, while reduced visibility and driver fatigue at night make nighttime driving inherently more dangerous. Thus, these scenarios are often seen as higher-risk activities that warrant higher premiums,” says Holeman.
How Do You Know if Usage-Based Insurance is Right for You?
Usage-based insurance is best for you when:
You don’t drive your vehicle a lot. If you don’t put a lot of miles on your car – because you live near work or you work at home, you frequently take public transportation, you have a second vehicle that you don’t drive much, or other reasons – you could save based on your low mileage.
You drive safely. If you don’t typically accelerate with sudden bursts of speed or slam on your brakes, you take turns gently, you stay off your phone, and you don’t have a history of accidents, your risk level could be lower and result in some savings.
You don’t drive during riskier times. If you stay off the road at night when visibility is lower and you don’t spend a lot of time in highly trafficked or congested areas like the city in rush hour, you could potentially save on rates.
You’re comfortable with sharing your data. If you’re OK with your insurer collecting your personal data, and you understand how that data is used, you might not have any objections with usage-based insurance.
Alternatives to Usage-Based Insurance
Looking for other ways to save on your car insurance? Here are some alternative options to lower your rates:
Bundle your policies. Some insurers offer a significant discount when you bundle your car insurance with another type of policy, like life insurance or homeowners insurance.
Raise your deductible. The deductible is the amount of money you have to pay out of pocket when you file a claim before insurance kicks in to cover the rest. If you increase your deductible, the insurer will lower your premiums.
Maintain a clean driving record. Having accidents or tickets on your driving record can drive up the cost of insurance. Try to maintain a clean driving record to keep your costs down, or see if your insurer will lower your premiums if you take a defensive driving course.
Maintain a good credit score. In some states, insurance companies can use your credit-based insurance score, a score based on your financial and borrowing behavior, to help determine your premiums.
Shop around. Just because you’ve been with an insurer for a while doesn’t mean you can’t jump ship for better rates. It pays to shop around with well-rated insurers every few years at least to see if you can get the coverage you need at a better price.
Get rid of comprehensive and collision coverage. If your car is worth less than the amount of your deductible plus the amount you pay annually for your policy, it might make sense to drop comprehensive and collision coverage and just keep liability coverage, which pays for damage or injury that you cause to other parties.
Drive a low-risk vehicle. The car you drive affects how much you pay for insurance. Moderately-priced cars with higher safety ratings are cheaper to cover than flashy or expensive vehicles.
In Closing
Usage-based insurance can potentially save you a lot of money, especially if you don’t put a lot of mileage on your car and you are a low-risk driver. But there are some tradeoffs, including the potential for higher rates and turning over additional data to your insurer. Evaluate your own driving behavior against the factors your insurer uses to set prices, and consider your own risk tolerance when it comes to data privacy, so that you can make an informed decision about whether usage-based insurance is right for you.
