What Is Usage-Based Auto Insurance?

If you haven’t heard about usage-based auto insurance, don’t worry – you’re not alone. Usage-based auto insurance is a relatively new type of policy that calculates rates based upon usage patterns, including distance, time and place. It’s often called “pay as you drive” and comes in three different forms:

1. Distance-Based: Most traditional auto insurance underwriters provide deep discounts for people who drive fewer than 7,000 miles annually. However, even that may be too costly when broken down by the mile. New distance-based options are a terrific alternative for college students, retirees or others who primarily rely upon public transportation but want to maintain a driver’s license for seasonal travel or short trips around town. Not only can a distance-based policy help control costs, but the prepaid option makes it easy to add coverage on short notice. Just be sure to keep a good eye on the odometer, because overages can be quite costly or even result in a denial of claims just when needed most.

2. Time-Based: Another popular form of usage-based auto insurance is time-based. Essentially you pay only for the actual time driven rather than miles or location. Vehicle information is recorded and transmitted to the insurance company in order to track actual usage patterns. Time-based usage is a great alternative for car sharing, small businesses and those who may benefit from driving during off-peak hours. Potential negatives include a lack of privacy, paying for time stuck in traffic jams as well as intrusive technology that monitors everything from speed to duration of the trip.

3. Place-Based: Anyone who has ever tried to navigate Los Angeles or New York during rush hour will certainly appreciate the open highway of an interstate. That fact isn’t lost on your insurance underwriter either. It has long been known that certain areas are more dangerous than others. Place-based policies are designed to address that difference while helping save money. Individuals and small-business owners are likely to enjoy substantial cost savings based upon actual risk, but in return, expect to give up some level of privacy.