When you consider all the factors used in formulating your car insurance premium, you may wonder why some of those metrics are used since they seem unrelated to driving. Usage-based insurance makes sense to a lot of people.
Telematics insurance technology is gaining speed, with more insurers launching pay-per-mile and pay-as-you-drive insurance products because drivers like customized coverage. We’ll explain usage-based insurance, how it works, and how much you could reduce your vehicle insurance rate by enrolling in one of these programs.
What is usage-based car insurance?
Usage-based car insurance is a type of policy that’s built around a customer’s driving profile. The insurance provider calculates your driving risk based on your actual driving and uses that information to calculate your rates. Of course, these policies also consider the other factors that insurers use, but your driving habits matter more in your rates with usage-based insurance.
There are two primary usage-based policies discussed below.
Driving Habits-Based Car Insurance
Progressive forged the way many years ago and made monitored driving popular with its “Snapshot” program. Policyholders could plug a device into their car that would monitor their driving habits related to risk. Then, the driver would send that device back to Progressive, where their risk would be calculated.
If drivers practiced low-risk habits, they would usually be rewarded with a discount. Now, almost every insurer offers this type of program, but as technology has improved, drivers may be able to use an app on their phone instead of a device installed in their car.
Miles-Based Car Insurance
These programs don’t monitor your driving habits. Instead, they track the number of miles you drive. As a result, they’re usually referred to as pay-as-you-drive policies.
Usually, a policyholder will have a low base rate for their coverage, and then they’ll pay a fixed rate based on how many miles they drive.
How does usage-based insurance work?
The two types of usage-based insurance policies work differently, so let’s examine each.
Rates Based on Driving Habits
When insurance companies monitor your driving habits, they can better understand your risk. Understanding risk is something every business must consider to succeed, and insurance providers deal with risk more than most other industries. Since some habits are associated with a higher risk of filing a claim, the insurer can more accurately calculate your risk.
But what driving habits do they look at? Some of the metrics used are as follows:
- Duration of trips
- Frequency drives
- Time of day
Rapid accelerations and hard braking indicate a driver has aggressive habits, which are more likely to be associated with crashes and filing a claim.
Taking corners fast indicates more risk, as does driving at speeds higher than the posted speed limit. In addition, certain times of day are associated with more traffic and a higher risk of being involved in an accident.
Some insurance companies promise policyholders that they can try usage-based insurance risk-free. In other words, even if their driving habits indicate a higher risk, the insurer won’t increase their premiums to reflect that. But if their data indicates low risk, they receive a discount.
Other companies will increase your premiums to reflect what they consider risky behavior. So, before trying a tracking app or telematics device, ensure you know the insurer’s policy. Then, you can avoid telematics if you think there’s a chance your driving would indicate a higher risk.
Rates Based on Miles Driven
Pay-as-you-go policies allow drivers to pay for the miles they drive. So, if you drive very few miles in one month, you’d pay less than if you drive a higher number of miles.
Insurance providers will need proof of the miles you drive. Sometimes they monitor your mileage using a telematics device, and other times they require you to send a picture of your odometer.
Drivers who travel very little tend to benefit the most from this type of insurance program, but even average drivers may discover they can save by opting for a policy based on their mileage.
Some drivers assume that if they’re taking a long road trip vacation, miles-based insurance would be expensive, but most companies offering this program have a plan for vacationers. That way, if you’re looking to save on your next vacation, your car insurance policy won’t get in the way.
How much can you save with usage-based insurance?
How much you can save depends on what you’re currently paying and your driving habits, but to give you an idea, check out the following savings.
- Progressive advertises that Snapshot users save an average of $156 a year.
- State Farm says you can save up to 30% with their Drive Safe and Save program.
- Allstate claims safe drivers can save 40% or more with DriveWise.
Other companies make similar claims. If your insurer offers a risk-free telematics program, it might be worth considering as long as you’re ok with having them monitor your driving.
Pay-as-you-go policies could help drivers save up to 40%. The best way to calculate your savings would be to get a rate quote from the insurance provider and calculate your average monthly miles to figure out what you’d pay compared to what you’re paying now.
Ways to Save on Insurance
Don’t forget that there are many other ways you can save on insurance in addition to using a usage-based program.
Save on Car Insurance With Discounts
With many usage-based programs, you can stack other discounts onto your policy to help you save even more. Some of the most popular discounts are as follows:
- Automatic payments
- Good Driver
- Good Student
This list is not exhaustive, so discuss possible discounts with your car insurance provider to determine if you’re eligible for more.
Comparing Car Insurance Quotes for Savings
If you’ve been with an insurance provider for a while, you might not realize that you could be spending less on premiums if you switched to another company. A comparison search will help you discover how much you could save by switching providers.
Telematics and usage-based insurance policies are excellent ways to save money. Make sure you do your research before trying it out though, just in case you could end up paying higher premiums by allowing your insurance provider to track your driving habits.
Good drivers typically appreciate a discount for their driving habits and are thankful they opted into the usage-based program.
Melanie Musson writes and researches for the auto insurance comparison site, BuyAutoInsurance.com. She’s passionate about helping people understand their insurance risks and find a policy that provides adequate financial protection.
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