Drivers looking to cut costs may see pay-as-you-drive insurance (PAYD) as the answer to their financial prayers.
Policyholders with this coverage allow their insurance company to electronically monitor daily driving habits.
In most programs, a device known as a dongle is attached to a car's computer system. In other cases, technology such as OnStar is used to capture driver information.
PAYD programs record information such as:
- The speed the car is traveling.
- The number of miles the car has been driven. Typically, this is based on annual mileage. The limit varies, but may be around 10,000 miles a year or less.
- The time of day you use the vehicle.
- Where you drive the car.
- How hard you brake.
- Whether you wear a seat belt.
In exchange for allowing this type of monitoring so they can better gauge their risk, the insurer promises to slash premium costs if the policyholder's driving behavior meets specific criteria.
The savings can be large. Progressive's Snapshot program and Allstate's Drivewise each offer driver discounts of up to 30 percent. State Farm's Drive Safe & Save offers discounts of up to 50 percent.
PAYD programs also provide drivers with ongoing feedback about their behind-the-wheel performance, says Lynne McChristian, Florida representative for the Insurance Information Institute.
"Some drivers start out thinking only of the potential savings," she says. "They overlook how a telematics device enhances safety awareness."
4 biggest pay-as-you-drive insurance myths
Surveys have found the public largely split about its interest in PAYD insurance.
A 2014 study, commissioned by insuranceQuotes.com and completed by Princeton Survey Research Associates International, found that 51 percent of drivers said they wouldn't enroll in this type of program.
A separate 2014 survey by the Deloitte Center for Financial Services also found that about half of drivers are reluctant to embrace PAYD.
For many people, the notion of being tracked raises various types of concerns, some of which are based on misconceptions about how PAYD information is used.
Here are four of the biggest pay-as-you-drive insurance myths.
1. Your privacy will be invaded.
Many people shy away from PAYD programs because they have concerns about how the recorded data will be used.
"The biggest misconception is about privacy," says Justin Herndon, a spokesman for Allstate.
The insuranceQuotes survey found that among people who said they never would use a PAYD program, 21 percent said they were most concerned about their personal information being shared with others.
The Allstate website says it uses data collected through the program for "the purpose of analysis and risk evaluation" in addition to calculating rates.
It doesn't use the information to resolve insurance claims without written request by the policyholder.
Other companies have similar policies. For example, Progressive pledges not to sell telematics information it collects to third parties, or to use the data to resolve an insurance claim without first consulting the policyholder.
Herndon also notes that the Drivewise program is strictly voluntary, and that people who enroll can opt out at any time.
In addition, PAYD programs generally allow participants to view reports about their driving habits by logging in to their policy page at the insurer's website.
2. Your rate is guaranteed to go down.
While many insurers specifically promise that signing up for a PAYD program won’t lead to any rate increases, this isn’t the case with other programs.
For example, Herndon says Allstate doesn't raise rates on drivers based on any negative information gleaned from the telematics device.
"The worst you can do is get a zero percent discount," he says.
But other insurers may raise your rates. For example, Progressive says that in some states, it will place a surcharge on policyholders who drive aggressively unless they opt out of the program within the first 45 days of enrolling.
And if you fib to State Farm about driving under 7,500 miles annually, and Drive Safe & Save reveals the truth, you could lose your low-mileage discount.
In addition, simply signing up for a PAYD program doesn’t guarantee savings. While some of these programs offer a small discount of around 5 percent just for signing up, there's no guarantee of any additional discount.
Any increase in the discount depends on your subsequent driving behavior.
3. The devices record when you drink and drive.
The insuranceQuotes.com study found that 52 percent of respondents believe PAYD programs track whether you consume alcohol and drive.
PAYD programs don't employ technology that can detect your blood-alcohol level.
Of course, that doesn't stop you from using telematics information as a wake-up call about your own driving habits, both when sober and while tipsy.
4. You're charged more if you drive in high-crime neighborhoods.
The insuranceQuotes.com survey found that 35 percent of respondents thought PAYD devices recorded and reported when drivers traveled through high-crime zones.
But PAYD programs generally state that such information isn't weighed when setting rates.
Progressive notes that while some of its devices record data about where you drive, this information isn't used when calculating your rate. The company website says this information is used only to "only as part of our ongoing efforts to improve Snapshot," but doesn’t elaborate.
Meanwhile, State Farm collects vehicle information in "broad geographic areas" of about 40 square miles, but doesn't try to pinpoint a vehicle's exact location. The information is only used for safety features such as stolen vehicle assistance and roadside assistance.
At Allstate, the situation is even more clearly stated: The company says flatly that it doesn't collect