All about usage-based auto insurance

Philip Rosenau |


Good drivers can get rewarded with lower premiums, but only if you let an insurer track your driving habits.

Because June 28 in Insurance Awareness Day, let’s examine one of the newest innovation in auto insurance—usage-based insurance. Usage-based insurance (UBI) prices your premium for car insurance coverage based on how much you drive (i.e., pay-per-mile) or how well you drive. Insurers who offer UBI offer premium discounts for safe or infrequent driving, along with percentage discounts for signing up for the service.


How does usage-based auto insurance work? Insurance companies have long used statistics such as mileage, vehiclelocation and driving records to calculate premiums. But with advances in mobile technology, insurers now can collect actual data on driving patterns and behaviors. They can use this data to rate premiums for drivers based on more accurate information on how far they drive or how well they drive.

Usage-based insurance requires a driver to install a tracking device in their vehicle or to download a tracking app on their smartphone. If the policy is based on how much you drive, the insurance company will record the total miles driven in a month and charge a per -mile rate for insurance coverage (plus a monthly base rate.) If you don’t drive often or not very far, you could see lower auto coverage premiums with pay-per-mile insurance.

For UBI-policies based on how well you drive, the insurer will track your driving behaviors for a specific period. For example, up to your next policy renewal date. If you drive safely—in other words, no speeding, no slamming brakes, no sharp turns—the insurer will lower your premium through discounts.


What are the downsides? An insurer will continuously gather and monitor information on your driving behavior, includingyour location, and store this data on company servers. Many people have privacy concerns about that. Firms have data safeguards in place to protect the personal information they collect, but those protections extend only so far.

You may also find your premiums don’t change or may even increase with usage-based insurance. Many drivers under-report how many miles they drive in a given year. Moreover, you may think you’re a better or safer driver than you actually are, at least in the eyes of an insurance company. These differences could reduce the savings you were hoping to see.


Should you sign up for usage-based insurance? Mileage-based insurance could be a great option if you have a shortcommute to work. It’s even better if you have no commute—if you’re retired or work predominantly from your home. Behavior-based auto insurance may also encourage you to be a better driver, helping you break bad habits when there’s a financial cost tied to them.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.

This material was prepared by LPL Financial.


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