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The Pros and Cons of Usage-Based Car Insurance

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Reviewed byJoel Ohman
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UPDATED: Aug 17, 2020

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Usage Based Insurance FactsDetailsSource
Usage Based InsurancePrograms have been around for a decade and are gaining in popularityThe National Association of Insurance Commissioners
Driving RecordOne incident could increase premiums up to $1,000Quadrant Data
Potential Program DiscountDrivers could save up to 25% with Usage Based InsuranceVarious Insurance Companies
Potential Rate IncreaseDrivers could see rate increases in some situations with recorded driving habitsVarious Insurance Companies
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Usage Based Car Insurance Summary

Are you looking for ways to lower your insurance rates? If you haven’t already heard, so-called “usage-based insurance” is one of the most talked-about (and controversial) technologies in the world of car insurance. Across many insurance companies, it’s becoming one of the most popular ways to get discounted rates. The pros and cons of usage-based car insurance have been hotly debated.

Looking at these new programs, the disadvantages of usage-based insurance (UBI) are offputting to some drivers. However, for many others, the pros outweigh the cons. Usage-based auto insurance is gaining traction and lowering premiums.

When choosing your car insurance liability limits, you may be wondering if UBI would be a better option for you. This guide will help you gain a better understanding of UBI and lay out the advantages and disadvantages of usage-based insurance so you can make an educated decision about whether or not this type of program might work well for you.

If you’re looking for usage-based insurance as a way to lower your rates, start by entering your ZIP code into our free tool above to compare cheap usage-based rates and plans available in your area.

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Pros of Usage-Based Insurance

As discussed, usage-based insurance records information gathered through a telematics device installed in your car. This information is then sent back to insurance companies to review and determine how you are driving. Depending on how safe you drive, this has a variety of potential benefits.

Discounts For Safe Drivers

Devices used by insurance companies to record driving habits can be beneficial to those who are good, safe drivers, as they’re rewarded with immediate savings. Most insurance companies boast discounts of up to 25 percent off.

While your insurance rates depend heavily on your previous driving record, UBI programs allow the driver to report safe driving daily and prove or improve their driving record with their insurance company.

Usage-based insurance provides current and ongoing data about your driving so that rates and discounts can be calculated quickly. While 25 percent is the maximum offered discount, most drivers report getting a five to 10 percent discount after recorded driving.

The video below is from Allstate and explains its UBI program, DriveWise. This is an example of how you might be rewarded through one of these programs.

Encouraging Better Driving Habits

These programs that track things like how often someone brakes hard, turns too sharply, speeds, or engages in other bad driving habits have the potential to encourage drivers to improve.

Since rate discounts are potential rewards for better habits, drivers will be more eager to adapt their driving. This of course means fewer accidents and infractions and can lead to insurance companies paying out fewer claims. The ultimate result could be fewer expenses and lower rates for most drivers.

Better driving habits could lead to immediate discounts and overall lower rates.

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Cons of Usage-Based Insurance

Not every aspect of usage-based insurance is positive, however.

Privacy Concerns

One of the drawbacks of a usage-based system that critics mention is the concern about customer privacy. These systems plugged into cars and sending data from apps record a great deal of information about you and your driving habits. The devices track things such as location and distance. Everything you do while driving could potentially be recorded.

There are many questions as to how this information could be used. Insurance companies must ensure that the use of the information meets with all privacy laws and regulations.

Theoretically, these devices will know if you get in a tiny fender-bender, something that otherwise wouldn’t be reported. These types of dents and dings that often go unnoticed could lead to more unnecessary claims, which would drive up the cost of car insurance and frustrate drivers.

Imagine you and a family member bump into each other with negligible damage. The next thing you know you’ve got your insurance agent on the phone to discuss a scratch.

There are also regulatory red flags here, especially if certain drivers — perhaps a particular social or ethnic demographic — were to be singled out as being the worst of the worst. It would look equally bad if one group was rewarded more than others.

Use Of Information

While the systems have the potential to record a wide range of information, there are certain details that can’t be recorded. For example, if hard braking is recorded, circumstances such as a child or an animal running into the road will not be considered, meaning you could be punished for committing a perfectly reasonable and safe act.

Some of these devices could ding you for driving late at night as well. The device doesn’t know you’re making a trip to the emergency room or conducting some other essential business. Distances driven are also often recorded, but not the type of roads driven on.

These details will likely take a while to work out.

What is a usage-based insurance program?

The frontrunner in this relatively new field is Progressive’s Snapshot, which is a small device that drivers voluntarily install in their vehicles that track their driving habits. Telematics is the term used for technology that allows insurance companies to monitor customer driving behavior to calculate usage-based premiums.

Does Geico use telematics? Usage-based insurance with the use of telematics has taken off. Most insurance companies are now on board with these programs. Ideally, safe drivers who volunteer to use telematics will be rewarded with lower insurance premiums. What is an insurance premium? The cost you must pay for the risk the insurer is willing to take should they have to make a payout following a claim

However, telematics may not work to your benefit if you’re a little too heavy on the pedal. Some of these telematics applications may even determine if a driver is texting while behind the wheel, or driving while under the influence.

Devices that track and report your driving habits are called telematics devices. There are a few types of telematics devices that can track your driving. Some companies use a mobile app and some use devices plugged into your car.

To learn more about how your driving habits might be recorded, check out this brief video.

Once the insurance company has recorded your data for a specified amount of time, decisions about your rates are made based on the information. While all of this sounds good, there may be unintended consequences.

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How does usage-based insurance work?

The National Association of Insurance Commissioners says that UBI programs arrived around a decade ago as a mileage-based discount program for good drivers. In these early versions, all telematics devices were plugged into cars to record driving information.

US News and World Report states that at the start of telematics in insurance and UBI, there were over a million cars in the United States recording driving habits. In 2018, the Insurance Information Institute estimated that there were 10-11 million telematics enabled insurance programs in place in the United States. That number has increased even more today as more and more consumers are looking for ways to save on insurance premiums.

The National Highway Traffic Safety Administration says that accidents cost over $200 billion annually. It’s no wonder that insurance companies are looking for ways to make America’s roads safer. Most drivers are also looking for ways to improve safety as well, so programs like DriveWise are appealing to consumers and insurers alike.

Take a look at the following table that outlines how much an incident on your driving record can impact your rates.

Average Annual Auto Insurance Rates by Driving Record
CompaniesAverage Annual Auto Insurance Rates with a Clean RecordAverage Annual Auto Insurance Rates with One Speeding TicketAverage Annual Auto Insurance Rates with One Accident
USAA$1,933$2,193$2,516
Geico$2,146$2,645$3,193
Nationwide$2,746$3,114$3,397
State Farm$2,821$3,186$3,396
Allstate$3,820$4,483$4,988
Liberty Mutual$4,774$5,701$6,205
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Having just one accident could cost you over $1,000 annually. Safe driving is in your best financial interest and a reason why usage-based insurance has caught on. In most cases, UBI is an optional program aimed at giving good drivers a discount while also allowing drivers to track their habits and see what they can do to improve.

Take a look at the video below to understand how this trend has shaped insurance plans and drivers.

The Insurance Information Institute states that insurers are capturing data from millions of vehicles to create information profiles on driving behaviors to support UBI programs. These programs are saving drivers money all across America.

A “Disruptive Technology”

Reviewers of UBI insurance note that telematics is a “disruptive technology” that could seriously shake up the insurance market.

At first glance, it sounds simple. Drivers install a small device in their car that tracks things like speeding, cornering, braking, and miles driven, and then reports back to the mothership.

Once the data is digested, the insurance company adjusts the premium accordingly.

Insurance companies win because their customers get in fewer automobile accidents, thus lowering the cost of paying out insurance claims, and drivers also win because their premiums drop. Some even argue that the presence of such a device will lead to safer and more thoughtful driving, which presents yet another win for society at large.

So far, it sounds like the disruption is a positive one, but we all know things are never that simple, as some critics point out.

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Increase Of Rates

Many of these programs do not advertise rate increases as a result of program use. While several companies will not raise your rates because of information collected, there are a few that will.

In the same vein as rewards for good driving, there could also be penalties for bad driving. In some instances of program use, customers have reported rates increases instead of discounts. The hard braking and speeding that is recorded could be taken as an indication that you’re a risky driver and your insurer could raise your rates.

Again, many companies state that they will not raise your rates, but this a potential con with some companies increasing premiums.

In general, when UBI has been implemented, drivers have seen a decrease in their insurance rates of up to 25 percent. As stated above, the usual increase is five to 10 percent. As these programs are gaining traction, the potential drawbacks may be worked out. With telematics devices sharing information from drivers all over the country, usage-based insurance will likely turn out to be more beneficial than not.

Now that you know the pros and cons of usage-based car insurance, use our free tool below to compare plans and rates.
References:

  1. https://content.naic.org/cipr_topics/topic_telematicsusage_based_insurance.htm
  2. https://money.usnews.com/money/personal-finance/articles/2014/01/13/should-you-try-pay-as-you-drive-insurance
  3. https://www.iii.org/article/background-on-pay-as-you-drive-auto-insurance-telematics

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