Is Usage-Based Car Insurance Right for You?
Last Updated on April 12, 2021
Usage-based car insurance is one way to potentially save money on car insurance. However, it’s not the right choice for everyone. Today, we’re helping you decide if usage-based insurance is the right choice for you.
How Does Usage-based Insurance Work?
Usage-based insurance (UBI) is a type of vehicle insurance where your policy is customized based on your unique driving habits – including the time you spend driving, the distance you drive, the places you drive, and your driving behavior.
Typically, insurance companies provide insurance rates based on your demographic details. If you’re a 25-year-old male who drives 10,000 miles a year, then your insurance company will look at the driving habits of every other 25-year-old male driving 10,000 miles per year, then assign a rate based on their history of claims.
With usage-based insurance, the insurance company customizes your insurance plan in an attempt to differentiate and reward safe drivers from unsafe drivers.
A driver perceived to be safe might receive a lower premium and/or a no-claims bonus, for example.
Usage-based insurance is also known as pay as you drive (PAYD). To track your driving habits, your insurance company might install a tracker inside your vehicle (with your permission). That tracker could simply analyze the distance driven. Or, it could analyze more advanced metrics like acceleration and braking habits. Typically, this tracker is removed after a temporary analysis period – say, one month – is complete. However, some UBI plans require constant use of a tracking device.
In general, there are three types of UBI tracking:
- Your coverage is based on the odometer reading of your vehicle, and the insurer does not need to install any type of tracking device
- Coverage is based on mileage aggregated from GPS data or on the number of minutes the vehicle is being used as recorded by a tracking device
- Coverage is based on other vehicle data, including speed, time of day information, the riskiness of roads in specific locations, and driving actions, among other advanced metrics
Benefits of Usage-based Insurance
Is usage-based insurance the right choice for you? The idea behind UBI is that safe drivers can save a lot of money on car insurance. However, this isn’t always the case.
- Drivers are encouraged to drive more responsibly and take fewer unnecessary risks, leading to environmental and social benefits and potentially safer roads
- Insurance companies are better able to align their insurance plans with risk, leading to cost-savings for customers and insurance companies
- Good drivers are financially rewarded for good driving behavior, while bad drivers are punished for bad driving behavior
- Higher risk drivers are encouraged to stay off the roads or improve their driving habits unless they wish to continue paying high insurance fees
- The GPS trackers used by your insurance company to track UBI could track your vehicle when it’s stolen
Disadvantages of Usage-based Insurance
So you’re a safe driver. You’ve never been in an accident. You think usage-based insurance is the right choice for you. You feel you should be paying less money than other drivers on the road. Should you sign up for usage-based insurance? Here are some disadvantages to consider before you call your insurance company:
- Lower-risk drivers will always subsidize higher-risk drivers in an insurance pool; that’s the basic idea of how insurance works, and UBI doesn’t avoid this
- To qualify for usage-based insurance, you might be required to temporarily or permanently install a tracking device on your vehicle; this can raise privacy concerns
- Even the best trackers might not provide accurate driving information; inaccurate readings or “bad driving days” could skew results and make you look like a worse driver than you really are
- Usage-based plans are difficult to compare between companies because companies track usage in different ways; this makes it difficult for consumers to price shop, thereby reducing competition between insurance companies
That last disadvantage is important: it’s one of several reasons why people claim usage-based insurance is a ploy by insurance companies. Insurance companies understand how easy it is to price shop. You can get a quote in minutes online, then pick the lowest rate available. With usage-based insurance, plans can be customized to your specific needs – but you won’t be able to compare rates instantly upfront. This could discourage drivers from price shopping between companies, thereby inhibiting competition in the insurance industry. Of course, insurance companies deny this is the case.
What Are the Best Usage-Based Insurance Companies?
Our friends at The Balance recently published their list of the best companies to buy usage-based car insurance. Here’s how they stack up:
- Metromile – Metromile is an insurance company targeted to drivers with low annual mileage. Their program is great for annual usage under 10,000 miles.
- Progressive – Progressive’s Snapshot program comes with a small device to plug into your car’s port (under your steering wheel). It’s especially great for daytime drivers.
- Allstate – Allstate’s Drivewise program also uses a device that plugs into your vehicle’s port. Drivewise is recommended to drivers that drive safely and adhere to the rules of the road.
- Nationwide – Nationwide’s SmartRide program is perfect for newer vehicles. It offers policyholders up to a 40% discount on premiums and rewards drivers that avoid hard braking and fast acceleration.
- Esurance – Esurance’s DriveSense has a great, easy-to-use mobile app. It also evaluates things like braking style, speed, driving hours, and acceleration.
- Safeco – Safeco’s Rewind program doubles as an accident-forgiveness program. After an accident, install Rewind, and your accident can be forgiven after a period of safe driving.
- Travelers – Travelers’ Intellidrive offers drivers an immediate 10% discount on their insurance rates. It’s perfect for teenage drivers, but it’s only available in certain states.
Other usage-based car insurance programs include:
- State Farm – Drive Safe and Save
- Farmers – Signal
- USAA – SafePilot
- MetLife – My Journey
- American Family -KnowYourDrive
- GEICO – DriveEasy
- Liberty Mutual – RightTrack
- Mercury Insurance – RealDrive
- MAPFRE – DriveAdvisor
- National General – SmartDrive
- Root Insurance
- Noblr Insurance
Conclusion: Is Usage-Based Insurance Right for You?
Overall, usage-based insurance continues to be controversial. Some people claim it’s a ploy by insurance companies to charge higher rates, stifle competition, or invasively track driver behavior. Others see UBI as a great way to save money.
Theoretically, usage-based insurance is ideal for lower-risk drivers. You’re a lower risk driver if you drive more safely than others on the road, if you drive at safer times of the day, or if you drive less frequently than other drivers. If you meet any of these qualifications, then usage-based insurance could save a lot of money. However, it’s important to be aware of the potential disadvantages before contacting your insurance company about usage-based insurance plans.