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Usage-Based Insurance & How Telematics Can Save You Money

Usage-Based Insurance & How Telematics Can Save You Money

Whether you have just received your license or have been driving for years, telematics insurance programs give you the opportunity to save on car insurance when you practice safe driving.

Last Updated Feb 07, 2024
5 min read
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Enrolling in a telematics program - sometimes called usage-based insurance (UBI) - may give you access to special car insurance discounts. If you want to get rewarded for being a safe and steady driver, telematics insurance may be right for you. 

What Is Telematics in Car Insurance?

It's become increasingly common for insurance carriers to use telematics to determine how much a driver will pay for their insurance premiums. This technology allows insurance companies to develop usage-based pricing, which means your insurance rates can be adjusted depending on your driving behavior.

Keep in mind that the requirements and application process to join a telematics program often differ between insurance providers. However, most require you to use a device installed directly in your vehicle or download and install a telematics app on your smartphone.

Once the device or app is in place, your insurance carrier can gather many different types of information, which include:

  • Time of day or night when you drive
  • If you drive too quickly around corners
  • How many times you hard brake
  • Where you drive the vehicle
  • How many miles you drive
  • Frequency of rapid acceleration

How Does Usage-Based Insurance Work?

Usage-Based insurance uses an in-car monitoring device, plugin device, or mobile app to obtain data on many different aspects of your driving behaviors. Insurers will then use this data to calculate insurance rates. 

Generally speaking, there are two types of UBI: 

  • Mileage-based telematics insurance that charges you based on the number of miles you drive every year. This insurance is also known as “pay-per-mile” or “pay-as-you-drive” programs.
  • Behavior-based programs that aim to reward you when you drive safely. 

There are four basic components to a telematics insurance program, which include: 

  1. No matter where sensors are installed, data is gathered while you drive 
  2. Data is collected and aggregated by your insurance provider
  3. All data is reviewed to ensure your insurance rates match the latest information about your driving habits
  4. With access to this data, you can better understand your driving habits, maintain less risky driving, and you may benefit from lower insurance premiums

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How Do Pay-per-Mile Programs Work?

One of the telematic insurance programs you can enroll in is a pay-per-mile program. Your insurance rates are based on how many miles you drive during the year. If you're a low-mileage driver who mainly uses a vehicle, say, to run errands, this insurance program may help you reduce your monthly rates.

If you select pay-per-mile insurance, your provider will identify your base insurance rate and rate per mile. These calculations will still take your location, age, and driving history into account. You'll receive an app or device allowing driving-related data to be efficiently collected. At the end of your current insurance period, your rate will be recalculated with the newly-gathered data.

Keep in mind that pay-per-mile insurance can't be purchased in every state. The specific insurance provider you use determines if you can obtain pay-per-mile insurance and how much it will cost.

How Do Behavior-based Telematics Programs Work?

Behavior-based telematics insurance is designed to increase or lower your car insurance costs depending on how well you drive. Safe drivers invariably benefit from this insurance more than drivers who, for example, take bigger risks on the road or often slam on their brakes. As with pay-per-mile insurance, data can be gathered from a smartphone or in-car device. Some of the various types of behavior that can be monitored include:

  • Accelerating or braking quickly
  • Driving at high speeds
  • Using your phone while driving
  • Driving at night, or on the weekends

Every insurance company monitors a range of behaviors to assess risk and determine premiums. However, if you have a spotless driving record, you can leverage behavior-based insurance to unlock additional car insurance discounts and savings. It's worth noting that many insurers provide behavior-based insurance options, allowing you to benefit from personalized coverage tailored to your specific habits and driving patterns.

Different Types of Telematics Devices

The specific telematics system that you have access to depends on the insurer that you choose to sign up with. It is worth noting that while some insurance providers offer multiple options for telematics, others may limit their offerings to either a smartphone app or a plug-and-drive tool.

Plug-and-Drive Telematics Device

A plug-and-drive device is another piece of technology installed directly in your vehicle. It uses GPS technology to obtain and transmit data. 

The main advantage of a plug-and-drive device is that it can be installed in several locations, which include an OBD socket, USB port, or 12V adapter. In this scenario, the device can be moved to another vehicle if necessary. Make sure you tell your insurer you've switched cars if you want to receive a fair premium.

Smartphone-based telematics device 

Smartphone apps are highly convenient as they don't need to be installed in your vehicle. These apps often turn on immediately and gather data as soon as you start driving. Data can either be transmitted by GPS or Wi-Fi functionality. Since you likely have your smartphone with you no matter where you are, make sure that the company you choose allows you to categorize yourself as a driver or a passenger.

Whether you have mileage-based or behavior-based insurance, data can be used in several ways to determine insurance rates. If you're confident in your driving ability, telematics insurance can be highly rewarding.

“Black Box” Telematics Device

A so-called “black box” is a small telematics device typically secured to your car's dashboard. Once this technologically-advanced device is expertly installed, telematics data is effortlessly transmitted to your insurance company using Global Positioning System (GPS) technology. 

It's important to note that while these cutting-edge devices are often conveniently included as part of the insurance premium you pay, it's worth considering that an additional cost may be levied if you opt to switch vehicles at a later point in time. 

Is Usage-Based Insurance Worth It?

If you currently have a traditional car insurance policy, your insurance costs are predominantly determined by factors relating to your driving profile rather than just your driving behavior alone. This means that, under a standard policy, you may find yourself paying close to the same premium for a driver who isn't as cautious or someone who logs thousands of miles more per year than you do. 

However, by harnessing the power of telematics technology, your insurance rate becomes directly tied to how frequently you drive and your specific driving habits. With this innovative approach, if you consistently practice safe driving techniques, rest assured that your auto insurance rates can be lower, potentially leading to significant savings in the long run.

According to MarketWatch, certain insurance products indicate that drivers can save anywhere from 25-40% if they use a telematics program. 

RELATED: Factors That Affect Car Insurance Rates

Telematics Car Insurance Advantages

Whether you select a behavior-based or mileage-based insurance program, you can receive numerous benefits, which include:

  • Lower premiums that are by your behavior or mileage
  • Ability to control your insurance rates by driving less often or being safer while on the road
  • More insight into your driving habits
  • Real-time data that will help your insurance provider more accurately estimate how much damages cost
  • Promotes safer driving and a healthier environment 
  • Can be a great way to save on car insurance for teens

Disadvantages of Telematics

There are also several disadvantages associated with telematics, the primary of which include:

  • Driving data can be inaccurate if you don't remember to classify yourself as a passenger
  • Premiums don't necessarily remain at a fixed rate every month
  • This program isn't useful if you have a bad driving record
Man driving safely

Who Is Telematics Car Insurance Best Suited For?

If you don't find yourself driving frequently, pay-per-mile insurance might be an excellent option for you to consider. With this type of coverage, policyholders can save money on their insurance premiums by consistently abiding by the rules of the road and consistently practicing safe driving habits. This offers an appealing alternative that not only provides financial benefits but also encourages responsible driving behavior.

If, on the other hand, you have a lengthier commute or tend to drive at night regularly, you may want to avoid signing up for telematics insurance. The same is true if you often exceed the speed limit while driving on a highway. 

Should I Consider a Mileage-tracking Insurance Program? 

Mileage-tracking insurance programs are ideal for:

  • Employees who mainly work at home
  • Retired individuals
  • People who live in the city and use public transportation
  • Vehicle owners who don't drive often
  • Any person who drives less than 35 miles every day

If you drive over 12,000 miles during a given year, there are better ways to go than mileage-based insurance programs. There's a good chance that your monthly premiums can increase. 

Even at a few cents per mile, driving more than 12,000 miles per year can make pay-per-use insurance very expensive.

Should I Consider a Behavior-based Telematics Program?

Most drivers can benefit from this type of insurance program if they have a clean driving record and usually drive safely. Consider signing up for a telematics insurance program if you are:

  • A young driver
  • Someone who wants to improve their driving skills
  • A driver who lives in a high-crime area
  • Someone with a relatively low credit score 

You may want to seek a different type of insurance policy if you:

  • Find it difficult to avoid hard cornering or braking
  • Don't want to have a tracking device in your vehicle
  • Regularly make phone calls while driving
  • Often drive during rush hour or late at night

Privacy Concerns About Telematics Insurance

While this form of insurance has many advantages, there are also some privacy concerns that you should consider. 

For instance, comprehensive data about your driving will be gathered by insurers to determine your insurance rates. The information your insurance provider gathers can identify where you went, how long you were there, and who was driving.

Depending on how you feel about your privacy, you might be wary about an insurance company having access to this information. If you choose to sign up for a telematics program, select a provider that's transparent about the type of data they obtain. 

SteadyDrive's Telematics App Can Help You Save

SteadyDrive is not an insurer. We offer a mobile application that uses smartphone tech to rate your driving abilities and help you obtain auto insurance discounts from leading insurance carriers. Our app is free to use and includes a quick sign-up process that only takes around 30 seconds of your time.

Once you've installed the free SteadyDrive app on your phone, your driving habits will be tracked and analyzed in the background during an initial test drive with our telematics technology. 

Your privacy is a top priority at SteadyDrive. Unlike most telematic programs, we give you the opportunity to take an anonymous test drive to see if you qualify for an insurance discount without having to sign up for specific insurance apps. 

Your test drive will never negatively impact your current insurance rate and there is no obligation to switch insurance companies.

By practicing safe driving behavior, you could save hundreds on your insurance every year!

RELATED: How SteadyDrive Can Save You Money

Disclaimer:

SteadyDrive is not an insurer or an insurance agent or broker. SteadyDrive does not provide you with an insurance policy, so make sure that you have insurance coverage while you drive. Please contact your insurer or an insurance agent or broker (if applicable) directly regarding questions you may have pertaining to auto insurance coverage. For more details, see SteadyDrive’s Terms of Service.

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Discovering how to save money on car insurance can be a game-changer for your finances. In this comprehensive guide, we’ll cover various tips and strategies to lower your car insurance rates and provide helpful information to help you make informed decisions. You can secure the best deals and discounts from insurance companies with the right approach.
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