What is Usage-Based Insurance? How Can you reduce your Auto Insurance Premium?
Updated: Apr 24
Car insurance Policy
Car insurance Policy is a contract or agreement between you and the insurance company which protects your finance against a theft, an accident or any other natural causes or destruction of your insured car. The company agrees to pay a certain insured amount if any mishap happens to your car as outlined in the policy. The coverage includes Property damage, Liability or any medical bills.
What is a Usage based Insurance (UBI)?
Usage based insurance is a type of insurance in which the premium is decided by how good and safe your driving skills are. Your insurance company will be collecting data about your driving behavior such as how well and how often you drive. The data of your driving behavior is collected through an app in your smartphone or with a plug in device ( Telematics device ). Some people tend to lean towards UBI because they feel that the premiums are comparatively lower than their standard insurance policy.
How does it work?
The premiums for the usage based insurance can be calculated in two ways. They are Pay per mile and Pay as you go.
Pay per mile - The premium is calculated according to the number of miles driven, it usually has a base premium added to the cost for each mile driven.
Pay as you go - The premium is calculated by analyzing your driving behavior such as how fast you drive, how you accelerate and what time you drive etc.
Usually the insurance company collects data for about 6 months to get an idea about how safe your driving behaviors are and how many miles are driven and apply a discount to next renewal period. Some of the factors that influence in the calculation of premiums are
Your driving speeds
How fast your acceleration is?
Your driving times
How hard you apply brakes?
Total driving time per drive
Driving miles less than annual national average.
Benefits of Usage based insurance
Many people choose usage based insurance because the premiums are much less compared to the standard insurance premiums due to their driving mileage and behavior. It is worth it if you have safe driving habit or you hardly drive because you work from home.
In the event of an emergency
Having the usage based insurance is very useful during accident situations because your vehicle is monitored by Telematics app and it is easy for the first responders to locate the location of the accident and have an option in the app to contact the first responders with a push of a button. It also eases the insurance filing process as they have the exact data, it speeds up the process too.
Safer Driving Habits
It promotes safer driving habits as the drivers drive more carefully and cautiously as they are monitored through the Telematics device. As the safer driving habits reduce the insurance premium, consumers will be encouraged to reduce over speeding, Hard cornering, careful acceleration and brake application of the vehicle. Some insurance companies also provide rewards for safe driving where you can earn points and reimburse on gift cards of top brands to encourage safe driving.
Parked Location and Theft tracking
You can easily locate the location of your car parked through the Telematics app which is connected to GPS. If your car is stolen, it is easy to track the location of your car through the GPS tracking in your phone.
Drawbacks of Usage based insurance
Lack of Privacy
One of the main drawbacks that the usage based insurance may have is the lack of privacy as it tracks your location history all the time and the data is stored. Though it is used for the insurance purposes, many people are not comfortable sharing their location data all the time.
As the premium is determined by your driving behavior and mileage, you may be expected to be a cautious driver all the time while using acceleration and brakes. It does not suit the drivers who have to drive a lot or need to drive on unusual hours as it may increase the premium of the drivers more than a standard insurance rate.
If you are a Passenger
As the GPS in the app tracks your location and driving activity all the time, there is an option to select whether you are a driver or a passenger on the vehicle. The app usually gives up to a period of 10 days to update the data, but if forgotten it might add up those miles in driving record even though you were a passenger.
If usage based insurance is a fit for you or not, depends on factors such as how much you drive, how safe you drive, how comfortable are you sharing your location history etc. It benefits the insurance companies as they are able to attract low risk drivers and thus it reduces the insurance claim costs of their company.
The events and items covered by your insurance policy differs based on your policy and insurance provider. The conditions and limitations of the coverage vary upon your specific policy.