How Usage-Based Auto Insurance Works

If you drive a car, you must have auto insurance — period. This has led people to look for ways to pay less for it. In almost every instance it boils down to minimizing the degree of risk you ask an insurer to bear.

In the past, this has taken the form of higher deductibles, lesser coverage or infrequent driving. However, thanks to contemporary tech, there’s a new way for insurers to mitigate their risk and offer you savings in exchange.

However, it asks for something many people are reluctant to give up.

Here’s how usage-based auto insurance works.

Typical Rate Determination Factors  

The rate you’ll pay for traditional auto insurance is based on the following:

  • ZIP code
  • Gender
  • Age
  • Marital status
  • Driving record
  • Credit record
  • Years of driving experience
  • Previous coverage history
  • Claims history
  • Type of car, frequency of use, how it’s used
  • Desired coverage

Evaluating all of the above helps insurers predict the possibility of an insurance claim being filed on your behalf. The more risk factors you have against you, the higher your monthly premiums will be. There’s just one problem. You might well be less of a risk, even if you fit the risky profile to a “T.”

Insurers Need More Accurate Means

Computers in modern cars already keep track of how the vehicles are driven. They do so to help owners provide maintenance based upon the car’s actual situation, rather than arbitrary estimates. However, auto insurers can also use this information to determine your driving style.

A device plugged into the on-board computer can transmit that information to your insurance company. With it, they can see how you are braking and accelerating, where you’re driving, how far you drive each day — and how fast.

How This Affects Your Premiums

In other words, rather than asking you to estimate how many miles you drive over a given period, insurers can now see firsthand. That, along with all of the other data provided, enables the underwriter to bill you based upon your individual performance.

This can result in lower premiums in many cases, because you’re paying for your own behavior, rather than subsidizing that of all of the other drivers around you. On the other hand, it could rat you out if you’re a “wolf in sheep’s clothing.”

Let’s say you fit the ideal risk profile and qualify for the lowest rates on paper. However, you drive like every outing is a neck-and-neck race to the finish line at Le Mans. The insurance company will figure this out pretty quickly and bill you accordingly.

I Always Feel Like Somebody’s Watching Me…

Still, you have the potential to realize significant savings. All you have to do is chill. This can be a real boon if you’re looking at one of the best lease deals and figuring out how to fit it into your budget. After all, leases require you to carry full insurance coverage at the highest limits of liability.

Thing is, you’ll also surrender control over a significant aspect of your privacy to get those savings. Your car insurance company will be like Santa Claus. It’ll know when you’re sleeping. It’ll know when you’re awake. And — most of all — it’ll know when you’re being bad or good, but remember it’s looking out for its own sake.

So, now that you know how usage-based auto insurance works: Is it worth it?