If you’re in the market for auto insurance, you may have come across usage-based auto insurance and wondered how it compares to other types of auto insurance. Here’s everything you might want to know about usage-based auto insurance, which is sometimes also called pay-as-you-go, pay-as-you-drive, or pay-per-mile insurance.
What is usage-based car insurance?
Usage-based car insurance, sometimes abbreviated as UBI, calculates the price you pay for auto insurance based on how you actually use your car. The policies are generally opt-in, although there are some insurance companies such as Metromile that specialize entirely in usage-based auto insurance.
Drivers may want to choose a usage-based insurance company to save on auto insurance. Usage-based insurance typically favors drivers who don’t get on the road often, as well as people who drive carefully or safely.
Because your insurance company can consider how you drive, usage-based insurance can be fairer for drivers. Many traditional auto insurance companies use factors such as age, gender, and even credit history in some states, without considering how you drive in real-time, which might not accurately represent whether you are a risky driver.
What factors are considered with usage-based insurance?
Usage-based insurance, as the name suggests, is based on how much you use your vehicle. Instead of paying the same flat rate each month, you can pay for insurance coverage that is correlated with how much you drive.
The more you drive, the more risk you take on. The less you drive, the less risk there is. So when you opt for usage-based insurance, you may be able to slash costs and get a fairer rate.
Usage-based insurance can come in different forms and goes by different names, including:
- Pay-per-mile insurance
These options calculate car insurance based on the miles you drive. Other factors that may be considered are:
- When you drive
These driving behaviors can add more risk, which may affect your car insurance rate. Typically usage-based insurance companies use telematics devices to track important metrics while driving that may impact your car insurance.
For example, an insurance company might consider you a risky driver if you drive at high speeds or often drive at night when the visibility is lower. Some telematics devices and technology can also assess whether you’re using your phone while driving or how you maneuver your vehicle on the road.
Usage-based insurance gives drivers more control over their rates by focusing on factors they can influence. You can do your part to be a safe driver and be rewarded with cost savings if you drive less and have fewer risks. The factors considered can make auto insurance more driver-focused and equitable.
In contrast, traditional auto insurance companies often don’t consider these factors when determining your rates.
Plus, you might get a flat rate that doesn’t consider the nuances or lifestyle factors that can impact your rate. On top of that, companies may also use factors like gender or use your credit score to assess risk, which can be unfair. You might be a great driver with poor credit, which could hurt your rate.
However, this isn’t allowed in all states. For example, states like California, Hawaii, Massachusetts, and Washington state have plans to disallow or don’t currently allow insurance companies to use credit history when setting the cost of car insurance.
Who is usage-based insurance a fit for?
Usage-based auto insurance is ideal for people who don’t drive that often or too far — in other words, someone who is considered a low-mileage driver. If you drive 10,000 miles or less each year, you may be considered a low-mileage driver. Usage-based insurance may be a good fit for:
- Remote workers or those with a hybrid work schedule
- Self-employed people who work from home
- Environmentally-conscious individuals who primarily walk, bike, and take public transportation that occasionally drive
If you fall into one of these categories, you may be able to score significant savings and avoid pricey car insurance premiums.
Don’t see yourself in one of those categories? You may still benefit from pay-as-you-go insurance. Why? Because a whopping 65 percent of drivers with traditional auto insurance may be overpaying for their coverage because they’re low-mileage drivers.
Aside from low-mileage drivers, usage-based insurance is also a good fit for safe or careful drivers. With usage-based insurance, it’s easy for insurance companies to gauge how safely you drive and set an appropriate rate for you or offer discounts on car insurance. If you drive safely and don’t drive that often, you should pay less based on the lower risk.
How does usage-based insurance work?
If you’re a low-mileage driver and are considering a switch, you want to know how usage-based insurance actually works. As noted above, companies use the power of technology to offer the most competitive and fair car insurance rates.
Specifically, telematics devices understand your vehicle’s movement, speed, and how far or how often you drive. You’ll generally need to connect a device to your car’s onboard diagnostic port (OBD-II port).
However, you might be able to use your insurance company’s smartphone app or your car manufacturer’s online account if you drive a connected vehicle. In other words, it’s a super easy set up so you don’t have to be considered “tech-savvy” to take advantage of better rates with usage-based insurance.
Metromile provides drivers with a Pulse device that securely and accurately counts the miles they drive. The Pulse device also offers other benefits, including automated claims and free tools to help you find your car, plan your trip, look up fuel costs, and even get street-sweeping reminders in select cities directly from your mobile phone.
Some usage-based insurance companies may have similar devices or use a smartphone app to monitor your driving.
How you’re billed for insurance may vary based on the insurance provider. Some usage-based insurance policies might charge for insurance after each trip you drive. Metromile takes a different approach.
Metromile auto insurance policies have six-month terms, and you’ll keep the same per-mile rate for the entire term. You can get an affordable base rate and pay a few cents per mile. The good news is that miles are capped at 250 miles per day (and 150 in New Jersey), so if you have a longer road trip, don’t worry about it.
In some states, Metromile also considers how you drive, and unlike some other usage-based insurance, doesn’t consider individual trips or instances of speeding, hard braking, or cornering. Instead, how you drive over time is considered more important and used to determine your rate when you renew your policy. This also means you could earn a lower rate when you renew or sign up after your Ride Along™ trial.
Privacy concerns for usage-based insurance
When you have a usage-based insurance policy, you agree to let your insurance company monitor how you drive. It’s important to understand how your usage-based insurance company will use any data.
There’s some good news if you’re interested in usage-based car insurance and concerned about your privacy: Metromile allows drivers to disable their location services without affecting the price they pay for their auto insurance coverage.
Discounts available for usage-based insurance
If you opt for usage-based car insurance, you may be able to score some serious savings. On average, Metromile customers save 47 percent a year compared to what they were paying previously with traditional auto insurance, according to a 2018 survey of Metromile customers who saved.
And it started by switching to pay-per-mile auto insurance.
Metromile customers save on car insurance when they drive less.
* Average annual car insurance savings by new customers surveyed who saved with Metromile in 2018.
The bottom line
If you’re a low-mileage driver, it’s worth taking a look into usage-based insurance to see how much you might save. Safe drivers and people who don’t drive a lot can save up to $947 with Metromile and its usage-based auto insurance coverage.
If you’re not sure if usage-based insurance or pay-as-you-go auto insurance is right for you, you can take a free trial before you buy with Metromile and Ride Along.
Download the Metromile app and get a free auto insurance quote with Ride Along. You’ll then drive as you typically would for about two weeks (you should keep your current insurance policy to keep coverage during your trial). Once your trial period is complete, you can save up to an extra 40% off your auto insurance quote, depending on your state, for demonstrating safe driving habits during your Ride Along. You pay for gas by the gallon, so it makes sense to pay for car insurance based on the miles you drive. Grab your free quote with Metromile today.
Melanie Lockert is a freelance writer, podcast host of the Mental Health and Wealth show, and author of Dear Debt. She’s a cat mom to two jazzy cats, Miles and Thelonious, an amateur boxer, music lover, and needs coffee to function.