What is Usage-Based Insurance? How Can It Reduce My Auto Insurance Premium?
Let’s face it, auto insurance policies are far from cheap and affordable in most cases. With over 6 million passenger car accidents in the US every year, auto insurance is as compulsory as cars themselves. With more demand comes the scarcity of finding a good and cheap auto insurance policy. Did you know that most of the people who pay for their auto insurance are mostly overpaying? Paying the same price as everyone else while having much lower mileage results in overpaying. And for this reason, you should look at usage-based insurance policies.
You might have heard of this insurance with a different name, such as pay-as-you-go or pay-per-mile insurance. This auto insurance policy is also what many would consider a “fair” auto insurance policy. This article will describe in detail everything you need to know about usage-based insurance policies and how they can help you save money.
Table of Contents
General Auto Insurance Policy
When you buy a normal auto insurance policy, multiple factors are considered to decide the rate of the insurance. Factors such as your driving record, age, gender, previous traffic violations, etc are considered. The problem with this type of auto insurance policy is no matter how good you drive at the moment, or how carefully you drive now will not affect the price of the policy.
So just because you are a young male who had a few speeding tickets in the past, you’ll have to pay a lot more, even though you drive only a few miles every day and that too very carefully. This increase in price for general insurance is because statistically, with all those factors combined, you are more likely to be in an accident and make an insurance claim.
For general auto insurance policies, you pay more because the company thinks that you might make an insurance claim later. It’s like being punished for a crime that you did not commit. This makes finding auto insurance policies with a lower price very difficult. And here’s where usage-based auto insurance comes in.
What is Usage-Based Insurance?
Instead of using general factors such as age, gender, and other factors to calculate the upfront price of your insurance policy, usage-based auto insurance calculates the price of the insurance as you drive, and how you drive. Here the risk factor is calculated based on your actual driving and how much you drive. This allows you to pay a “fair” price.
The basic idea is this; the more a person drives, and how rashly they drive directly affects the risk of being in an accident. For example, if a person drives 1,000 miles in a month compared to someone who drives just 200 miles, he/she is more likely to be in an accident and make a claim.
Other factors such as when the person is driving, how fast they drive, and how rashly they drive give real-time and more accurate data on the possible risk of getting in an accident. This is what makes usage-based auto insurance very popular. It helps you pay less for the insurance policy while giving the same great coverage in case of an accident.
How Pay-Per-Mile Insurance Work?
Different auto insurance companies might have different names for this policy, and different ways of calculating the data and telematics. Here are some of the ways companies will get your driving data:
- Some companies will provide you with a device that plugs into your onboard diagnostic port (OBD II) where it collects important data such as acceleration, miles driver, braking frequency, etc.
- Some companies (and a majority of them nowadays) have an app that connects with the car’s software (if your car is compatible). This removes the need for connecting any device to your car and the app can collect all the relevant data automatically.
- Some companies offer “Tags” that stick to the windshield of your car and can monitor different metrics of your driving to gather the data. This tag pairs with your smartphone as well.
Data Collected by the Company
After getting access to your driving data, the insurance company will collect some data with your consent to calculate the risk of you getting in an accident and decide the price of your insurance policy. Do note that no insurance company will opt for your location data, i.e., where you go. Here’s what the companies need:
- The average speed of your car
- Rate of acceleration (how often you accelerate and how hard)
- Hard braking (sudden breaks) that indicate rash driving
- Hard cornering, which is collected from the car’s ESP software
- When the car is being driven. Driving at night is riskier than driving during the day
- How many miles are driven? The more you drive, the higher the risk of accidents.
- Use of phone while driving.
There could be some other data the company might collect. You can ask the insurance agent or look at their data collection disclaimer to see if they are tracking your location or not.
Is it Worth it?
Usage-based insurance is worth it if you drive only for a few miles and very carefully. It can bring a drastic difference in the price of your general insurance policy. People who either work from home or are self-employed and do not need to go to the office every day will benefit from this insurance policy the most.
If you drive carefully and mostly during the day with only a few miles every day on the odo, getting a pay-per-mile insurance policy will be the best way to save money on an auto insurance policy.
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