What is usage-based insurance? How telematics can lower your car insurance bill up to 40%.

Usage-based car insurance (UBI), also called telematics, rewards careful drivers with lower auto insurance premiums. It’s becoming increasingly popular among insurance companies and their drivers. Insurance companies benefit from knowing more about how their customers drive, and good drivers save money — a major perk when insurance rates are rising nationwide.

Intrigued? Read on to learn how UBI works and what programs are available. We’ll also cover the advantages and disadvantages of this coverage type so you can decide if UBI is right for you.

Understanding usage-based insurance

UBI programs collect data on your driving habits and then use that data to set your insurance rates. The type of data collected varies by insurance company, but may include:

1. When you drive

2. How often you brake hard

3. How fast you accelerate

4. How often you exceed the speed limit

5. How much you drive

6. How often you use your phone while driving

Insurance companies have different ways of collecting this information. Some provide a device that plugs into your car, and others require you to download a smartphone app. Depending on what car you drive, you may also have the option to send your driving data directly from your car to your insurance company. As an example, modern Toyotas are equipped with data communication modules that can, with your consent, send data to your insurer.

Types of UBI programs

These are two common types of UBI programs. While rules vary by auto insurance company, the type usually dictates how much driving information is collected and how it’s used.

1. Pay-per-mile

With pay-per-mile insurance, also called pay-as-you-drive, your insurance costs are largely based on the number of miles you drive.

You would typically pay a low base rate plus a variable per-mile charge. The driving data supplies your mileage, which is multiplied by your per-mile rate to determine the variable part of your bill. The base rate and the per-mile rate are set based on normal auto insurance pricing factors, like your age, gender, and the type of car you drive.

2. Pay-how-you-drive

Pay-how-you-drive programs consider how many miles you drive and your behaviors on the road. Insurers will track things like your acceleration rate, braking habits, smartphone usage, and more to help determine the overall cost of your auto insurance policy.

How usage-based insurance works

Drivers who participate in a UBI program must agree to share their driving data, and then initiate that data sharing with the insurance company.

For pay-how-you-drive programs, the insurer may offer an enrollment discount and then assess your on-road behaviors during a trial period. Trial periods can vary in length, depending on the insurer. At the end of your trial period, your insurer may offer you a deeper discount if its assessment reveals that you’re driving safely. Discounts may apply at your next policy renewal or sooner.

Pay-per-mile programs typically don’t have trial periods. Your coverage simply begins on the policy effective date. Your bill is adjusted monthly according to the miles you drove.

Here’s a look at potential savings through popular insurers.

Usage-based car insurance programs

Pros and cons of usage-based insurance

Pros

• Potential cost savings: It’s possible that if you drive infrequently or have safe habits on the road, you’ll save a significant amount on your auto insurance premiums.

• Incentive for safe driving: The potential cost savings can serve as a helpful incentive for developing and maintaining safe habits behind the wheel.

• Customized premiums: Instead of paying standard insurance premiums based on your driving record, demographic factors, and the car you drive, your insurance coverage will align with your driving behaviors and total mileage.

Cons

• Privacy concerns: Consumer advocacy groups have expressed concerns over a lack of transparency about how insurers use driver data. While many insurers say they don’t sell or share driver data, groups like the Consumer Federation of America are calling for more oversight.

• Data accuracy and fairness: Concerns about privacy and data have further led to some states attempting to establish regulations of telematics with the goal of ensuring data is accurate and reliable, and insurance companies are pricing premiums fairly.

• Limited flexibility for certain drivers: If you drive long distances or have established habits like accelerating quickly or hard braking, usage-based insurance probably isn’t for you.

Is usage-based insurance worth it?

Usage-based insurance likely isn’t worth it if you tend to drive above the speed limit or engage in other high-risk behaviors on the road, such as texting while driving. But if you’re a low-mileage and relatively safe driver who obeys the rules of the road, it may be worth exploring a UBI program.

Doing so could help you save money on your insurance premiums, even just by signing up. Compare potential savings with popular insurers before moving forward with a program, as some insurance companies offer larger discounts than others. For instance, drivers who participate in Nationwide’s SmartRide program can get up to a 40% discount, while those who participate in Liberty Mutual’s RightTrack program can earn a 30% discount.

Besides driving habits and insurance rates, privacy preferences also play a role, as your insurance company will have access to your driving data, including your habits and overall mileage. When determining whether a UBI program is right for you, consider how you drive, how many miles you drive, and the privacy factor.

If a UBI program doesn’t seem like the best option, but you’re still interested in reducing your insurance costs, other avenues may be open to you. Many insurers offer discounts. For instance, you may be able to get a bundling discount if you bundle your auto and home insurance policy, a discount for paying your premiums annually, or special savings for having a car with certain safety features.