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Auto Insurance

How Telematics Can Save You Money on Car Insurance

Telematics electronically tracks your driving habits and can ultimately save you money on your auto insurance. However, telematics may not be right for everybody. Read on to see if telematics can help you save money on your car insurance.

telematics

Telematics offers a way for drivers who practice safe driving habits to save on car insurance. By collecting data about the number of miles driven or the behavior of drivers behind the wheel, telematics devices and applications provide a more accurate picture of how, when, and where drivers are using their vehicles. Those who drive significantly less than the average driver, accelerate and decelerate slowly, and do not drive above the speed limit can see this translate into lower premiums.

While there is a potential drawback here — drivers provide insurance companies access to monitoring data generated while they’re on the road — car insurance with telematics may help drivers reduce their total cost of insurance. 

What Are Telematics?

Telematics is a combination of the words telecommunications and informatics, and refers to the process of remotely collecting data from objects using and analyzing this data to determine patterns.

When it comes to car insurance, the cars are the objects from which to collect data: Information is collected about your vehicle and driving habits to create a picture of how you drive, which is then used to determine your insurance costs. When you participate in car insurance with telematics, your insurer provides a digital device to install on your car and collect the data.

Telematics has recently emerged as a way to help reduce the cost of vehicle insurance. By sharing driving data with insurance companies, drivers can receive customized insurance policies and premiums that are reflective of their actual driving habits rather than generalized averages. 

How Does Car Insurance with Telematics Work?

In the context of car insurance, telematics typically takes two forms: devices and applications.

Device-based telematics, also called black box telematics, relies on a small device that plugs into the diagnostic port of your vehicle. This telematics device records driving behavior, including current speed, rates of acceleration and deceleration, and how far your car travels per trip. Your insurer will provide the device, which will come with instructions on how you may install it.

Application-based telematics relies on the driver’s smartphone. Drivers download and install their insurance company’s telematics application onto their phones. When the phone is in the vehicle, the application records driving data and sends it to the insurance company for processing.

Why Use Telematics With Your Insurance?

The ultimate goal of telematics for car insurance is to lower overall insurance costs by capturing accurate data about vehicle usage. Historically, insurance companies have based policy pricing decisions on factors such as clients’ driving history and self-reported information about how far the policyholder drives and how often they use their vehicles. In the absence of hard data, companies often use the self-reported information and combine it with national averages on driving distance, repair costs, and accident rates to come up with a risk assessment.

Telematics data, however, allows drivers to provide a clearer picture of their driving habits. For example, if a policyholder tells their insurance company that they drive 1,000 miles in a month but telematics data finds they only drive about 500 miles, the difference could result in lower rates because typically reduced driving distance also reduces the risk of accidents.  

Telematic Insurance vs. Pay-per-Mile Insurance

In addition to how the data is provided, there are two broad types of telematics that analyze what kind of data is reported: pay-per-mile insurance that looks at how much someone drives, and behavior-based telematics insurance that looks at how well someone drives.

A pay-per-mile program is exactly what it sounds like: Drivers pay a set amount for insurance that covers a specific number of miles per month. Telematics devices or applications then record the total distance driven and report this data to insurance companies. If the number of miles driven is at or under the specified amount, drivers pay the agreed-upon amount. If they go over this amount, they pay a per-mile cost that is added to their monthly premium.

For example, you may agree to pay for a per-mile policy that covers up to 1,000 miles a month. As long as you drive 1,000 miles or less, your premium would remain the same. However, if your telematics device or app shows that you drove more than 1,000 miles on a certain month, your insurer may charge you more for each extra mile driven. This type of policy is best for those who drive significantly less than the average driver, and who drives a predictable amount each month to avoid overages.

Meanwhile, behavior-based telematics considers driving behaviors in addition to miles driven. In-car devices or applications may collect data about when and how the vehicle is being driven, including how hard someone brakes or accelerates. This additional context allows insurance companies to provide insurance policies with premiums tied to specific driving behaviors, especially if someone consistently shows that they practice recommended safe driving habits, such as accelerating slowly and driving within the speed limit.

Who Should Consider Telematic Insurance?

Telematics insurance may be beneficial for drivers who infrequently use their vehicle and/or who have a record of safe and reliable driving. For example, a retiree who uses their vehicle twice per week for trips to the local shopping center and back could find significant savings with telematic insurance. Under a standard insurance policy, their rate would be based on factors such as their age, driving record, type of car they drive, and a generalized average of miles driven.

However, using a telematics approach, this same driver could provide data showing that they drive only 20 miles per week, operate their vehicle at or under the speed limit, and are only out during less risky daylight hours. This type of detailed data allows the insurance company to create a policy price that better reflects the driver’s actual behavior rather than assumed risk.

Who Should Not Consider Telematic Insurance?

Telematics insurance may not be a good fit for drivers who frequently use their vehicles, who are less predictable with how often and when they drive, and who may not always practice recommended driving habits. In addition, if you do not like the idea of sharing this type of data with your insurance company, telematic insurance is not a good fit for your needs.

For example, if your driving habits are variable where you only drive a few times one month but then begin commuting every day the next month, it may not make sense to purchase telematics insurance. Unlike standard insurance policies that charge a fixed premium rate per month based on risk assessments and driving data you provide when you apply, usage-based insurance fluctuates along with your driving habits. Having unpredictable car usage month over month can make your car insurance premiums too unstable for comfort, making it harder to predict your overall bill.

In addition, some telematics programs assign greater risk to driving at night. This means that if you’re a shift worker who regularly goes to work or comes back home when the sun is down, you may end up paying more for your insurance than if you purchased a standard auto insurance policy instead.

How Much Does Usage-based Car Insurance Cost?

The average cost for traditional car insurance is just over $1,000 per year. Depending on how you drive and how often you drive, usage-based car insurance could save you between 20% and 40% of this cost, putting your potential premiums anywhere between $600 and $800 per year.

However, as this type of insurance depends on your own driving habits, be sure that you drive significantly less or safer than the average driver to realize these potential savings. For example, if you drive as much as or more than the average driver — about 13,000 miles each year — you would not see any savings with a pay-per-mile telematic car insurance policy. In fact, you would likely end up paying more than you would with a standard car insurance policy that did not rely on your mileage.

Likewise, if you are not habitually displaying safe driving habits — such as if you know you tend to brake hard or drive above the speed limit at times — a telematic car insurance plan that tracks your driving behavior would likely end up costing more than a standard policy.

Safe Driving Habits to Get the Most Out of Your Usage-based Insurance

The safer you drive, the lower your rates could be with telematic insurance. The most common things that behavior-based telematic driving devices measure correlate with how much it impacts your risk of getting into a collision. To ensure you are showing insurers the best version of your driving skills, commit to the following safe habits.

Drive within the posted speed limit

Driving over the speed limit increases the time it takes to stop your vehicle, in turn increasing your chances of a crash. Consider a residential neighborhood with a speed limit of 25 miles per hour. At that speed, it takes 85 feet to stop your vehicle. However, at just 5 miles per hour faster, that stopping distance is 109 feet — a significant difference that also increases risk.

In addition, posted speed limits are in place to reflect the environment in which you are traveling through. For example, residential neighborhoods have low speed limits because there could be pedestrians, playing children, pets, and other unexpected obstacles in the street. Driving above the speed limit could put you and others at a higher risk of an accident.

Limit your car trips overall

Fewer car trips mean few opportunities for a crash. After all, you are not at risk for causing a collision if your car is safely parked. For this reason, insurers may consider those who drive significantly less than the average 13,000 miles per year to be less risky to insure. This could be especially beneficial for those who drive little month after month and have pay-per-mile insurance.

Accelerate slowly and brake gently

Slower acceleration and braking help reduce the wear and tear on your vehicle, in turn making it both safer and more reliable, which can be good news for insurance companies and for your insurance premiums. Slow starts may also help avoid accidents, especially in heavy traffic. For example, if the car in front of you begins to accelerate and you stomp on the gas pedal — only for the car in front to brake again — you could end up causing an accident. Likewise, braking too suddenly can cause other drivers to crash into you, which also makes you a riskier driver to insure.

Use your indicator to change lanes

Forgetting to use your indicator is risky, as other drivers may not be able to predict your actions. Even if you are changing into an open lane, another driver may unknowingly accelerate into the previously open spot if they do not know that you are intending to do the same. Using your signals for turns and lane changes can help reduce the risk of sideswiping another car, and it can indicate to the car behind you that you will likely be decelerating soon to make a turn so they should expect to brake too.