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How Usage-Based Insurance Works – Low Cost Advisor


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If you’re looking for a type of car insurance that better reflects your good driving skills, usage-based insurance (UBI) might be a good fit for you. UBI is an option offered by some auto insurance companies that tracks your driving and could result in lower car insurance rates—if your driving scores well.

Usage-based insurance programs generally measure speeding, acceleration and harsh braking, along with mileage and the time of day you drive. You get a driving score and often tips for improving your score. The better you drive, the better your auto insurance rates.


How Does Usage-Based Insurance Work?

Usage-based insurance programs collect vehicle “telematics” data that comes from cellular, GPS or other technology. These programs track certain driving behaviors such as:

  • Speed
  • Acceleration
  • Hard braking
  • Hard cornering
  • Miles driven
  • Time of day
  • Phone use while driving

The technology used to track your car’s telematics data depends on your car insurance company. Generally, driving data is collected in these ways:

  • Through systems built into your car, such as BMW ConnectedDrive or OnStar
  • Through a device plugged into your car’s on-board diagnostics (OBD-II) port, such as Nationwide SmartRide
  • Through a smartphone app, such as Allstate Drivewise or Farmers Signal
  • Through a device called a “tag” that is installed on your windshield or rear window and pairs with your smartphone via Bluetooth, such as Liberty Mutual Insurance RightTrack

Some insurance companies will offer you a choice of how you want the data collected, depending on where you live. For example, Liberty Mutual Insurance RightTrack offers you the choice among a tag, plug-in or mobile phone, while State Farm Drive Safe & Safe lets you choose between a smartphone app or your car’s OnStar system.

How your driving habits affect your car insurance premium will depend on your insurer, but in a typical UBI plan, your driving habits are tracked over a certain period of time. After you complete the initial review period, you may be offered a discount based on the telematics data.

Traditional auto insurance pricing factors are also still generally built into your rate, such as your driving record, credit, vehicle type and location.

Nearly half (49%) of drivers who were offered a telematics option for their car insurance policies opted into the program, according to a survey in the TransUnion 2022 Insurance Trends and Outlook Report.

Is Usage-Based Insurance Worth It?

Usage-based insurance holds the promise of lowering your car insurance rates if you’re a very good driver. But it doesn’t work out that way for more than half of drivers who opt into telematics programs. According to the TransUnion survey, car insurance rates decreased for only 48% of those enrolled in a telematics program and stayed the same for 30%.

And here’s where you really need to pay attention to the fine print. Some car insurance companies might raise your car insurance premiums if you don’t score well during the review phase of a UBI program (although some states don’t allow this). According to the TransUnion survey, 18% of drivers had their auto insurance rates increase. And 4% said they didn’t know if their rates were affected.

Yet the majority of drivers who enrolled in a telematics program were satisfied with their choice, according to the survey. Nearly two-thirds (64%) were “very satisfied” or “extremely satisfied.” About a quarter (26%) of respondents said they were “neutral” about their telematics experience.

About two-thirds (64%) of survey respondents said they are still using a telematics program.

Overview of Usage-Based Insurance Discounts

What to Find Out Before You Sign Up for Usage-Based Insurance

Many large auto insurance companies offer usage-based insurance, but it may not be available in every state.

Before you sign up, make sure you understand the program’s rules. You’ll want to know exactly what driving behaviors are being measured and how your driving might impact your car insurance rates.

There are some other quirks to be aware of. If your UBI program uses your phone to track driving behaviors, you need to know how the app works and if it tracks you as a passenger. For example, with Travelers IntelliDrive, you have 10 days to change driving information in the app if the app incorrectly records a trip in which you were a passenger, not the driver. You don’t want someone else’s bad driving scored against you.

You also want to know the consequences of opting out of the program. With some programs, such as Nationwide SmartRide, you’ll need to complete a four- to six-month evaluation period, but you’ll keep whatever discount you earn for as long as you insure your car with Nationwide. On the other hand, with programs such as MAPFRE’s DriveAdvisor, you’ll lose the UBI-related discount if you decide to opt out.

Some Drivers are Uncomfortable Having Driving Data Tracked

Not everyone loves the idea of letting their insurance companies get a detailed look at their driving behaviors. How driving data is used or shared was the top concern (35%) for survey respondents according to a 2021 Telematics Consumer Survey by Arity, a telematics and analytics provider founded by Allstate.

More than two-thirds (34%) of survey respondents were also concerned about driving data being accurately or fairly assessed. Some respondents (31%) worried that a telematics program could increase their car insurance rates. About a quarter of respondents thought it would be too much of a hassle to participate (25%) or would not result in enough savings (24%).

Best Car Insurance Companies 2022

With so many choices for car insurance companies, it can be hard to know where to start to find the right car insurance. We’ve evaluated insurers to find the best car insurance companies, so you don’t have to.

Consumer Advocacy Group Pushes for Telematics Transparency

The Consumer Federation of America (CFA) sees usage-based insurance as a tool that can save drivers money and potentially eliminate the use of non-driving factors in car insurance rates, such as occupation, education and credit-based insurance scores. But the CFA warns that UBI in its current form has some major pitfalls.

In a recently published white paper, the CFA says that telematics programs currently lack rules for pricing transparency and consumer privacy. The organization says that telematics could help insurers end the use of non-driving factors in pricing, but regulators must make sure that UBI programs don’t create new forms of unfair discrimination in auto insurance.

The CFA recommends state regulators adopt consumer protections such as:

  • Require insurers to demonstrate the actuarial basis for the data that’s collected and used as part of a UBI program
  • Require insurers to get consumer consent for use of data
  • Prohibit insurers from selling, renting or sharing telematics data for non-insurance purposes
  • Require insurance companies to test for and minimize disparate impacts of UBI programs on protected classes (such as race and ethnicity)
  • Allow consumers to review all the data collected from telematics and have access to the data for use in claim settlements
  • Any data shared among insurers through an exchange or contributory database should fall under the Fair Credit Reporting Act and oversight by state regulators and the Consumer Financial Protection Bureau
  • Companies that develop telematics algorithms should have to be licensed as insurance advisory organizations and subject to state insurance regulations

Related: Best Car Insurance Companies

Usage-Based Insurance FAQ

What’s the difference between usage-based insurance and pay-per-mile insurance?

Usage-based auto insurance tracks driving behaviors such as speeding and harsh braking. Your car insurance premium is adjusted (often in the form of discounts) based on those driving behaviors.

A typical pay-per-mile insurance policy calculates a base rate and a per-mile rate. For example, a pay-per-mile plan might have a $30 per month base rate and a $0.06 per-mile rate. So if you drove 500 miles in one month, your premium would be $60 ($30 monthly base rate 500 miles x $0.06 = $60).

Can I get a good driver discount without participating in a usage-based insurance program?

Many insurers offer car insurance discounts for safe drivers. If you drive without incident for a certain amount of time, meaning no car accidents or traffic violations, you’ll typically qualify for a good discount. The amount of the discount varies by insurance company, but usually ranges anywhere between 10% to 40%.

What other ways can I save on car insurance for being a safe driver?

Your car insurance company might reward safe drivers in other ways. For example, some insurers offer diminishing deductible car insurance. Sometimes known as a “disappearing deductible” or “vanishing deductible,” this is a perk that decreases the amount of your deductible if you maintain a clean driving record over time.

For example, if your program shaves off $100 every year for safe driving and you have a $500 deductible, you could get your deductible down to zero for five years of safe driving.

But some companies charge extra for a diminishing deductible, which may not be worth it.


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