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Is usage-based auto insurance cheaper?

by AllGeekToMe
Car Driving

Auto insurance can be costly, and many who use their cars less frequently are turning to insurance offerings that are pay-as-you-drive, or otherwise based on usage. Are these rates really cheaper, though, and will they work for your situation?

As a general rule, usage-based insurance is cheaper as long as you don’t drive a lot and are a safe driver. However, there are circumstances where a usage-based insurance plan may not be cheaper.

We’ll go over some of the basics of determining the worth of usage-based auto insurance and whether it is beneficial to your situation.

What types of usage-based insurance policies are there?

There are a few main types of usage-based insurance, including pay-per-mile, pay-as-you-go, and pay-as-you-drive insurance. Many of them overlap in how they work and how costs are calculated, but there are also a few that have key differences. Most major companies also offer usage-based discounts in one form or another.

Pay-as-you-go and pay-as-you-drive are both basically the same type of policy, though there can be slight variations. They both usually involve your driving being monitored to calculate your insurance rate instead of being given a specific quote from the get-go. This allows you to buy insurance that is based on your driving habits more than on other criteria.

To a certain extent, both pay-as-you-go and pay-as-you-drive function as pay-per-mile policies. Pay-per-mile tracks the number of miles you drive on a daily, weekly, or monthly basis. They occasionally also track how you drive (such as whether you speed or follow certain laws.) The rates are based on your mileage more than anything else.

Usually, you will be charged a low base rate with a per-mile fee tacked on. This can vary slightly based on your demographic and credit score.

In this regard, pay-per-mile, pay-as-you-go, and pay-as-you-drive tend to be the same type of policy. There are, however, a couple of different types of usage-based policies besides these.

Yellow race car

Beyond Mileage-Based Usage Policies

Two policy types focus more on how you drive than how far. 

Pay-how-you-drive uses technology and constant monitoring to adjust your rate based on various factors. These factors include how hard you brake and accelerate, how sharply you turn, and at what times of day you drive.

Manage-how-you-drive policies are basically more advanced versions of pay-how-you-drive; they offer near-instantaneous feedback, allowing your insurance cost to fluctuate more.

Driving habit monitoring is usually provided by various tech options such as a black box, a dongle, or even your smartphone. There are many tech tools and tips you can use to monitor your driving habits and pick the most efficient routes to maximize your insurance.

In addition, most companies simply offer usage-based discounts rather than full plans. The sole exceptions are Root and Metromile insurance companies, which are the only companies that offer real usage-based insurance policies.

Most major companies simply offer usage-based discounts instead.

Is usage-based insurance cheaper for everyone?

Usage-based policies will be cheaper for those who do not drive often, such as those who work remotely from home and need to commute less. It can boost savings for those who run their businesses from their homes or who are in otherwise costly demographics.

For example, teen drivers notoriously can be expensive to insure. However, a teen who practices safe driving habits can take advantage of usage-based incentives to reduce their rates. Safe drivers and those who drive at less-traffic-heavy times will also benefit.

Those who drive during high-traffic times or at night or who have to commute frequently will likely find usage-based insurance to be more expensive than other options.

Usage-based insurance will raise your premiums if you engage in risky driving behaviors such as speeding and phone use (especially if your plan is monitoring how you drive). You also might get your premiums raised if you score low during your usage-based program review.

What else should I know about usage-based insurance?

According to a 2020 Nationwide Insurance survey, 65% of consumers would be alright with having their driving monitored through a telematics device for insurance discount purposes. However, currently only 10 percent actually use one, and it seems that many consumers also have some concerns about privacy.

Specifically, some people are concerned about data privacy and what their insurance companies will and won’t share with third parties. It’s important to talk to your insurance agent if you have any privacy concerns.

In addition, usage-based insurance is not offered in every state. It’s important to know just what type of program your insurance provider offers as well and what behaviors are monitored. Also, some programs require you to complete an evaluation period that lasts between four to six months.

Why should I consider usage-based auto insurance?

Pay-per-mile, pay-how-you-drive, and other usage-based programs tend to attract low-risk drivers, which allows insurance companies to keep rates low. This also lets your provider focus on developing and sustaining customer relationships and loyalty. In other words, insurance providers want you to appreciate and need their coverage, giving you leverage.

The large numbers of low-risk drivers in these types of programs and discounts reduce claim costs and allow you to personalize your insurance process. It can be especially valuable for those who work remotely or otherwise have an alternative driving experience.

Usage-based insurance can be a great way to improve your premiums and cut down on costs, especially if you know you don’t drive very much. However, you will want to talk to your provider and compare costs to make sure you get the best deals.

More usage-based programs will likely roll out in the near future, but for right now you may have to settle for low-usage discounts.

If you are in a category of drivers that tend to be viewed as high risk, but you have good driving habits, then this type of program would help you save a lot of money on insurance premiums.

If, however, you have to drive during high-traffic times and your car needs and habits reflect a more typical driving experience, then you may want to consider other options such as accident forgiveness insurance or full coverage insurance.

Deborah GoldbergDeborah Goldberg writes and researches about usage-based insurance, driving discounts, and more for the auto insurance comparison site, BuyAutoInsurance.com.

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