Is Usage-Based Car Insurance Right for You? These 5 Questions Will Help You Decide
Car insurance based on how much, or how well, you drive can cost less than a traditional policy -- but it may take months of driving before you can confirm that. Fortunately, answering a few key questions can help you predict in advance if making the switch is likely to work well for you.
Usage-based car insurance is expected to grow in popularity by a staggering 30% annually in the next few years, according to Transparency Market Research. That predicted boom means you’ll probably be hearing a lot more about this coverage option, from both “insurtech” startups like Metromile and Root and major insurers like Liberty, Nationwide, and Progressive that have rolled out national programs.
Yet because these insurance alternatives are fairly new, and based directly on your driving, you may not know upfront how switching to them from a traditional policy might affect your rates -- or suit you in other ways.
This story’s quick quiz can help you quickly figure out the payoff from taking a test drive with one of these differing forms of car insurance.
Is your annual mileage low enough to pay-as-you-go?
If you drive fewer than 10,000 miles a year, you’re a prime candidate to save with pay-as-you-go car insurance, which is the simplest kind of usage-based insurance. Standard car insurance considers how far you drive, based on your self-reported mileage, but mostly considers such factors as your age, driving record, and vehicle.
Pay-as-you-go insurance uses those personal factors, too, but only to set a base monthly rate for your policy, typically between about $30 and $60. You’re then charged per mile -- typically 4 to 7 cents or so -- for how far you drive, as recorded on either a smartphone app or an onboard monitoring device.
Let’s run the rough math on a pay-as-you-go arrangement for the average U.S. driver. That motorist clocks about 1,100 miles a month -- and so might get charged $65 or so for mileage (at 6 cents a mile), plus a $50 monthly fee. The total cost -- of about $1,400 a year -- may or may not be lower than what you’re currently paying, depending in part on whether you’re in a state with relatively high or low insurance rates.
But if you drive less than the average, the advantage to pay-as-you-go billing increases. Traditional car insurance offers discounts to those who drive less, but the savings can be modest -- often no more than $100 or so a year for driving 6,000 miles a year rather than 12,000, according to a comparison by AutoInsuranceQuote. By contrast, the same drop in mileage would deliver savings of more than $350 a year to the pay-as-you-go driver we detailed above.
If you drive even less, the savings might be bigger still. Traditional insurance often doesn’t offer further discounts for those who drive fewer than 6,000 to 7,500 miles a year. But pay-as-you-go insurance does through its per-mile pricing. Someone who drove only 200 miles a month might save a further $150 or so a year, for a possible savings of $500 or more over a traditional policy.
Do you drive well enough to try telematics?
Where pay-as-you-go car insurance focuses on how far you drive, the other flavor of usage-based insurance is concerned more with the quality of your driving than its quantity. As such, it’s worth trying if you drive more safely than most -- or at least think that you do.
The monitoring for so-called pay-as-you-drive (or "telematics") insurance includes tracking your mileage but focuses most on your behavior behind the wheel. The insurer assesses the risk you pose by recording how fast you drive, and how aggressively you accelerate, brake, and corner. It also considers the times at which you drive, with rewards for avoiding trips at night -- and sometimes during rush hour, too -- when accident rates tend to be highest.
Like mileage-based policies, telematics insurance also considers the car you drive, along with such personal data as age, traffic tickets, and more.
Insurers typically claim that good drivers can save up to 30% on their premiums by signing on to a pay-as-you-drive policy. But what if the monitoring -- which, as with pay-as-you-go insurance is also done via either an app or an onboard device -- reveals your driving to be less-than-desirable?
Most companies pledge not to use the bad news against you to raise your premium over what it would be with a traditional policy. However, you should inquire about a company’s current policy, especially if you’re unsure about how your driving (or that of others who drive the vehicle) stack up against the norm.
Do you want tips to drive better?
Insurers don’t only use the driving data they collect to set your premiums; they also send it back to you in reports that detail what you have and haven’t done well in your drives.
You may welcome that feedback, to help you and fellow drivers of the vehicle to drive more safely -- and perhaps cheaply, too. You can, for example, track over time whether you’re taking fewer corners sharply or less often leaving stop signs at tire-squealing speeds.
On the other hand, if you’re inclined to resist or resent suggestions about your behavior behind the wheel, you may find frequent reporting on your driving to be intrusive and annoying.
Are you comfortable with sharing your data?
For some people, the insurer knowing when and where they’re driving (your location may also be monitored), and how well, may be a downside to pay-as-you-drive insurance.
Data-sharing aside, some advocates have sounded alarms about how driving data might be used in the event of an accident. “If you opt into a drive tracking program like DriveWise or Snapshot, you give your insurance company permission to use your driving data to resolve insurance claims,” writes Indianapolis attorney John Hensley. “But that doesn’t guarantee that they will use the data in your favor.” Hensley fears that driving information may be used to assign “as much fault as possible” to the driver, resulting in “smaller settlements.”
Can you get a discount just for trying it out?
Still game to try usage-based insurance? Consider starting your shopping with your own insurance company.
While it’s generally smart to shop for car insurance from multiple providers, using such tools as the one Money offers, switching insurance companies and technologies at the same time might be more than you want to tackle. A free trial with your current carrier allows you to dip your feet into a new policy type -- and will usually earn you a thank-you discount just for trying it out.
Begin by confirming if your insurer offers usage-based options where you live. Most major companies offer pay-as-you-drive programs, and a few also offer a pay-as-you-go option as well.
Programs that are national, or nearly so, are those of Farmer’s (called Signal) Liberty (Right Track), Nationwide (SmartRide and SmartMiles), Progressive (Snapshot), and State Farm (Drive Safe and Save). Other companies typically offer telematics in anywhere from five to 30 or so states, with continued expansion promised throughout 2021.
As a rule, insurers offer their customers a try-out discount of 5% or 10% for a pay-as-you-drive trial that runs for three or six months. Assuming a six-month period, the average driver, whose insurance costs $866 every six months, could get a give-back of $43 or $86 as a thank you for trying telematics.
Insurers don’t guarantee you will continue to get a lower rate after the trial, because that depends in part on the data they gather. If your rates do drop, however, most companies limit the size of the reduction, typically to no more than 20% to 40% less than you were paying with traditional insurance.
If your insurer doesn’t offer usage-based insurance, you can of course go to another carrier, including a dedicated pay-as-you-go provider such as Metromile.
That could prove less desirable than trying out the new insurance with your present insurer, at least in the short term. You may not qualify for a discount for trying out the new policy and going elsewhere will mean you need to cancel your existing coverage with that insurer, or pay for it in parallel until you’ve decided whether to stick with the new coverage.
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