Should You Try Pay-As-You-Drive Insurance?

There are good arguments for – and against – usage-based insurance.

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For several years now, car insurance companies have bombarded the nation with television commercials, beseeching consumers to sign up for what is commonly called pay-as-you-drive insurance, although some in the industry prefer the term "usage-based insurance." You'll also hear this type of insurance referred to as telematics, which describes the combined use of technology and information.

The idea behind pay-as-you-drive insurance is that if you are as good of a driver as you tell your family and friends, you shouldn't mind attaching a device to your car – usually to your auto's onboard diagnostics port – that collects information about how you drive, such as how you hard you brake and whether you tend to have something of a lead foot.

Should you sign up? After all, while these devices were once something of a curiosity, they're becoming more mainstream. Last year, a LexisNexis Risk Solutions survey of 2,072 U.S. residents found that 1 in 3 consumers are aware of usage-based insurance. And telematicsupdate.com, an industry website, estimates that about a million cars in the United States were using telematics devices at the end of 2012. It projected that by the end of 2013, there would be five million cars using these devices.

[Read: 14 Ways to Slash Your Expenses in 2014.]

For those who have considered installing the gadgetry but have questions, here are some answers.

Who offers pay-as-you-drive insurance? Some of the big players include Progressive, Allstate, State Farm, Travelers, Esurance, the Hartford, Safeco and GMAC. That said, even if a company offers this insurance, it may not offer it in your state. Each state regulates its own insurance (there is no national standard), and each insurer is navigating each state's red tape allowing pay-as-you-drive or usage-based insurance to be offered to consumers.

How much do drivers save when they use these devices? Typically, insurers promise consumers that they'll save anywhere from 20 to 50 percent; just how much depends on your insurer. Some insurers offer an immediate discount, usually 5 or 10 percent, for simply installing the device.

Can a driver lose money by using the device? If a driver can lose money, the insurers don't mention it in their marketing, and some company spokespeople will flatly say the consumer will not be charged more money, or lose their policy, by using these devices. For instance, Sarah Inciong, the director of the Drivewise program, the usage-based insurance plan for Allstate, says: "The way our program is designed, it's only to reward people for good driving. The worst that will happen is that someone won't save much – or anything."

Tony Hare, product managing director for Travelers, says the same thing – that no discount is the worst-case scenario.

What exactly do these devices measure? It depends on the company, but most measure a car's speed, the time of day or night that driving is done and the mileage. Some, like Travelers' IntelliDrive, have a GPS component, in which you can track where you've been driving. Some critics have suggested that there's an ominous Big Brother aspect to this type of tracking, which is why most insurers aren't utilizing GPS. But proponents see the data, including the GPS information, as a "Big Parent" approach, one that their customer-parents will welcome. For instance, Travelers' IntelliDrive program can send speeding alerts to the consumer – which can be helpful to know if your kid is out driving the car.

"Many customers use the alerts to help coach their teenage drivers," Hare says.

Inciong echoes the same sentiment. "A parent can log into the website and show their child, 'Here are patterns of risky behavior,' or maybe your teen is a really good driver, and you can show them, 'You're doing really well,'" Inciong says.

There is a limit to how much information these programs track. For instance, Inciong says, at least with Allstate's Drivewise program, if you're driving 10 miles faster than you should be in a 45-mile-per-hour zone, your device won't know that.