This article has been reviewed by licensed insurance industry expert Moshe Fishman.
Usage-based insurance programs have been around since the mid-1990s, but the concept has sparked renewed interest from both car insurance companies and consumers in the last few years. So, what exactly is usage-based auto insurance, and can it save you money on your insurance premiums?
With inflation eating away at paychecks, many Americans are looking for ways to save money on essentials, like car insurance. Fortunately for good drivers, a usage-based insurance policy might provide the break they need.
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What you should know:
In the mid-90s, auto insurance companies looked to increase their profit margins while cutting costs by attracting safe drivers. They actively sought out low-risk policyholders who were less likely to be in accidents and create losses for the company. The idea was "pay how you drive."
Early versions of usage-based insurance (UBI programs) offered rock bottom rates to the drivers less likely to be in accidents. But due in part to technological limitations, there were constraints on the amount of data used to make underwriting decisions that determined risk and premium amounts.
Initially, these companies offered their policyholders significant discounts for driving fewer miles per year, and many places still offer these types of deals. Now, increased usage of vehicular GPS systems and other built-in technology have led to greater precision in determining risk factors, as programs track your driving.
While early versions of usage-based car insurance relied heavily on the odometer to report car usage, telematics has taken this concept up several levels. The modern vehicle is a motorized computer with the ability to monitor and report real-time data on any system in the car, well beyond just the miles you drive. The practical application represents the latest technology, but the concept and planning have been around much longer.
The U.S. military developed GPS in the early 1960s. The system helped track the movements of government vehicles and other assets in real time. Telematics combines GPS tracking tech with vehicle speed, fuel consumption, seat belt usage, and many more data points used by insurance companies to determine a driver's risk profile.
For drivers, there are many benefits of using telematics in vehicles. Maintenance alerts and safety issues are two of the advantages drivers appreciate most.
Telematics allows all of the car's systems to interact with each other, allowing for safer, more energy-efficient vehicle operation, saving you money at the pump. Routine vehicle maintenance is also more straightforward with telematics technology, which tells drivers when the vehicle requires mechanical attention.
Automatic emergency braking systems are becoming more commonplace in newer vehicles and potentially lifesaving to the telematics network. This braking system allows drivers to avoid thousands of collisions every year. By avoiding collisions, these systems help save insurers money.
The potential for discounts due to safe driving habits backed up by the data from telematics can be substantial. In addition, the regular feedback drivers receive can make them better, safer drivers. While the technology is groundbreaking, there are some limitations that you should be aware of before deciding if it might be right for you.
The first step in signing up for a usage-based program is to contact your insurer, to see whether they offer usage-based insurance. If so, the insurance company will send you a tracker device in the mail to collect your driving data, or they will give you a link to download an app directly to your smartphone. Specific permissions must be agreed upon to download the app successfully.
These permissions allow the app to track in-depth information about your driving behaviors. These tracked behaviors are hard braking, speeding, rapid acceleration, and time of day. Precisely which behaviors they follow and the effect on your discount will vary by insurer.
One significant disadvantage to an app-based telematics insurance interface is the inability to tell the difference between drivers and passengers. If you are riding as a passenger in someone else's car or even on public transportation, the driver's behavior can count against you and potentially raise your rates.
Most cars manufactured after 2005 have an onboard diagnostics port (OBD) on the dashboard directly under the steering wheel. Mechanics use these ports to diagnose mechanical problems with the car. Sometimes insurance companies use these ports to attach a tracker to an insured vehicle.
Some vehicles come with a fully equipped telematics system installed. These services go by the names like OnStar, BlueLink, or mBrace and can provide driver data directly to the insurance company.
Some people have raised concerns about the sheer amount of data collected by these tracking apps and devices. For many, the genuine issue of a data breach potentially exposing their detailed driver data is enough to pass on any potential telematics insurance savings.
In legal proceedings, there is the potential for the location data in your car for use as evidence. Police and other government entities can subpoena this data, potentially placing you at the crime scene.
While smartphones can provide location data, the telematics data provided by a vehicle tracking device is more in-depth and, unlike a cell phone, cannot be turned off.
The potential for substantial savings with usage-based car insurance does not apply to everyone. Some drivers in specific demographics will benefit from this type of insurance. While some others, unfortunately, may see a rate hike with this program.
Young drivers without tickets or other driving infractions pay a high premium for car insurance based on their age and lack of driving experience. These types of drivers benefit the most from usage-based coverage. But middle-aged, experienced drivers with excellent driving records who are already seeing fantastic rates on their car insurance premiums will probably not benefit at all and based on other factors may even see a rate hike.