Money Fix: If you're driving less, consider usage-based car insurance

After a year where belt tightening was the norm, people are going a step further and rethinking all their bills. What about usage-based car insurance?

Usage-based insurance (also called pay-as-you-drive, pay-how-you-drive and telematics), offers drivers the option of having premiums tailored to their driving patterns. What’s the attraction? If you drive less — and safely — you could be rewarded with a lower premium. You’re likely driving less if you’re now working from home and not socializing like you were in the good old days. Driving safe, that’s within your control. So in your quest to save money, explore usage-based insurance.

Here’s the lowdown.

How it works

An insurer tracks various aspects of your driving, by connecting directly to your car through a built-in or inserted device or by monitoring your activities through an app downloaded to your cellphone. The devices and apps measure factors such as miles traveled, speed traveled, acceleration, hard braking, sharp turns, phone use, location, and the time of day driven.

The devices and apps gather this real-time data and transmit the information to insurers, who use the information to set rates, price new auto customers’ policies, and modify premiums when policies are being renewed. Usage-based auto insurance uses algorithms to make use of the gathered data.

The pros

"If you're a safe driver with good driving habits, then this program can help you save money on premiums," said Alice Stevens, an insurance expert for BestCompany.com, a customer review platform.

Experts estimate that drivers can save up to 15% of their insurance costs annually using usage-based car insurance. According to the Insurance Information Institute, nine of the top 10 private passenger auto insurers have usage-based insurance programs in place.

"You can save big bucks on premiums. UBI makes your auto insurance almost personalized," said Arnas Vasiliauskas, chief innovation product officer at CarVertical.com, a provider of vehicle history reports.

The cons

Usage-based car insurance isn’t right for everyone. "It’s best for people who drive under 11,500 miles a year. If you don’t have good driving habits, then it might not save you any money at all. And if you aren’t comfortable with your driving habits being tracked, then it may not be worth the amount of money it saves you," said Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.

Michael DeLong, insurance advocate for the Consumer Federation of America in Washington, D.C., says insurers have been unwilling to disclose their algorithms used in UBI, including the full scope of data they collect. He fears insurers could be tracking more about consumers than is necessary to assess risk, or monitoring things that lead to unfairly discriminatory pricing. There is also a lack of privacy protections for consumers. States regulate insurance, and most do not have comprehensive laws specifically focused on usage-based insurance. There are security concerns. Hackers could break into the devices, seize the data, and use it for their own ends.

The insurance company should have a disclaimer on its website that outlines its privacy policy and how any personal data gathered will be used. If not, contact the insurer for that critical information.

Is UBI for you?

Do the math. Multiply the daily rate by the number of days in a six-month period for the six-month base rate total. Estimate what your mileage will be for the next six months. Using the charge per mile, calculate how much driving that mileage would cost. Add this total to the six-month base rate total. "If the final number is lower than what you currently pay, it may be worth choosing UBI," Stevens said. "If it is close to what you're currently paying on car insurance, it may not be worth it."