What is Usage-Based Insurance? Can it Reduce My Auto Insurance Premium?

by | Aug 1, 2022

Finding affordable car insurance can be challenging, especially for a young driver trying to find the lowest base rate and avoid higher deductibles. Safe drivers often end up paying more than their fair share in premiums, and finding a way to make car insurance more equitable is an appealing prospect for car owners.

Usage-based insurance programs offer an innovative solution to this issue, giving drivers more control over the outlay they must make for auto coverage. Learn more about usage-based insurance and whether it can give you a reduction in auto insurance premiums.


How Do Insurers Assess Driver Risk With Conventional Auto Insurance?

Insurers assess driver risk in several ways, but the two most important factors are driving history and demographics. Your driving history is a record of your past behavior behind the wheel, and it’s the best predictor of how you will drive in the future. 

Insurers look at your accident history, traffic violations, and claims to determine how likely you are to have an accident or make a claim. 

Demographics are also taken into account when assessing risk. Factors like age, gender, and zip code can all play a role in determining your premium. In general, young drivers and those living in high-crime areas tend to be considered higher-risk drivers and pay increased premiums on car insurance.

In some cases, taking a defensive driving course can help you save up to 20% on a conventional auto insurance policy. This is especially useful for drivers who require high-risk auto insurance

Some states require insurance providers to offer discounts to consumers who take defensive driving courses. You can find a defensive driving course near you and relevant eligibility requirements by looking up what applies in your state.    


What Is Usage-Based Insurance?

Usage-based insurance (UBI) is an innovative type of auto insurance that uses technology to track a driver’s behavior. Also known as telematics, UBI uses data from onboard sensors to record factors like how far the vehicle’s daily mileage, the time of day it’s driven most, and how fast the vehicle travels. 

Some insurers also offer discounts for drivers who share their data, which they use to improve the accuracy of pricing for everyone. While usage-based insurance is still relatively new, it’s growing in popularity as a way to make auto insurance more affordable and fair.


How Does Usage-Based Insurance Work?

Also called pay-as-you-drive (PAYD) or telematics, usage-based insurance uses a telematics device installed in your car to track mileage, driving behavior, and other factors. Insurers use this information to calculate rates based on real-time driving behavior rather than factors like credit score or zip code. They use the collected data to calculate your rates. 

The goal of UBI is to encourage safer driving and reward good drivers with lower rates. Usage-based insurance can also help insurers better assess risk, leading to lower car insurance costs for all policyholders. In some cases, UBI data may also be used to give discounts for things like low mileage or safe driving habits. 


How Can UBI Save You Money on Your Car Insurance Premiums?

Insurers offering UBI use various methods to track mileage, such as a plugin device, an app, or on-board diagnostics (OBD/OBD-II). The most significant benefit of UBI is that it can help you save money if you are a safe driver who doesn’t drive often. 

Because your rates are calculated based on actual driving behavior, good drivers who don’t log many miles can get favorable rates. Some UBI programs offer discounts of up to 50% for low-mileage drivers. 


Quicker Claims Process With Usage-Based Insurance

UBI savings aren’t only evident in lower insurance premiums but can extend to time and money saved after an accident. The longer a claim drags on, the more costly it can be for insurers and drivers. Usage-based systems allow for fast and efficient claim resolution so drivers can return to their everyday lives as soon as possible.


Are There Any Drawbacks to Usage-Based Insurance?

Gaining access to favorable car insurance rates is attractive for those with a safe driving record. However, all drivers should consider a few potential drawbacks to usage-based insurance. 

One concern is that UBI could lead to higher rates for certain drivers, such as those living in areas with high traffic congestion or driving during peak hours. Research shows that these drivers are a higher risk group due to spending more time near other vehicles.

A further cause for concern involves the data security of the information that some drivers will voluntarily share with insurers in exchange for lower rates. Major data breaches and the sale of consumer data from organizations that collect information make many consumers uncomfortable sharing their data. 

The case of Facebook and its involvement in the Cambridge Analytica scandal is fresh in many peoples’ minds. The case involved Facebook being aware that user data had been collected without consent but not informing users or taking steps to protect their information. For safety-conscious consumers, having reservations about allowing insurers access to vehicle data is understandable.


How Do You Sign Up for a Usage-Based Insurance Program?

Many insurance companies offer usage-based programs. Signing up is as simple as contacting your insurance provider to see if they provide a UBI program. If they do, they will send you a device to plug into your car to get started. 

Once installed, the device tracks your driving. You may be able to see your rates online or in a mobile app, and they’ll usually adjust automatically as your driving habits shift. As long as you keep the device plugged in, you’ll continue to get UBI. If you unplug the device or stop using the program, you’ll likely return to paying standard insurance rates.


Is Usage-Based Insurance Right for You?

If you are looking to reduce your auto insurance premium, usage-based insurance might be an option for you and your family. UBI programs give you a safety score based on your driving. This score can act as a safety feature that helps you monitor the driving habits of young drivers in your household. 

Usage-based insurance can also help you and your family members treat your driving as you would a credit card or a job. The more you follow best practices, the greater your potential reward in the form of a discount.

On the other hand, drivers who are skeptical about insurance companies collecting data on their habits may be less likely to purchase UBI. Data integrity is an increasing concern for many consumers, and waiting for greater transparency from insurers may be preferable.

Insurance is an essential part of your life, and Finance is us has the resources to guide you toward making the right choices. Finance is us also helps consumers avoid rookie investment mistakes and understand banking products.


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.