This Way to Save Money on Car Insurance Has 3 Big Drawbacks. Here's Why You Should Do It Anyway

Image source: Getty Images

Car insurance costs went up by over 20% per year, according to recent survey data. Many drivers are reeling from the rapid increase in car insurance premiums. Instead of a barely noticeable monthly bill that fades into the background of everyday life, car insurance is becoming a major cause of financial stress.

One of the most frustrating things about higher car insurance costs is that they often feel unfair. Drivers might be asked to pay higher auto insurance premiums even if they didn't get into a crash and don't violate the speed limit.

Many car insurance companies now offer a special kind of car insurance to reward drivers for safe driving. These plans are often called "usage-based insurance" or telematics car insurance -- because the insurance is based on each driver's actual driving behavior, measured by data-tracking telematics technology. With telematics car insurance, drivers can get their own personal car insurance premium based on how well they drive everyday.

Drivers who want to retake control of their car insurance costs might want to try telematics car insurance. Let's look at the possible drawbacks of telematics car insurance -- and why more drivers should try it anyway.

Drawback No. 1: Drivers must share their driving data

To use telematics car insurance, drivers must agree to share some of their driving data with their car insurance company, usually via mobile app or connected device.

Some typical data that car insurance companies might track (with the driver's permission) could include:

• Stopping speed (how hard drivers hit the brakes)
• Average speed
• Acceleration
• Driving late at night (driving during higher-risk hours of the night can create a higher chance of collisions)
• Phone handling (drivers who use their phones while driving are at higher risk of crashing)

Many drivers might not want to share driving data with their car insurance companies, feeling like it's too intrusive. But drivers who are open to the idea could get cheaper car insurance by proving to their car insurance companies that they are safe drivers who obey the speed limit.

Drawback No. 2: Car insurance discounts are not guaranteed

Signing up for usage-based car insurance does not guarantee that drivers will save big money on car insurance. Some car insurance companies' telematics insurance plans might even increase a driver's car insurance premium based on high-risk driving data. Other companies might not offer substantial discounts.

However, some of the best car insurance companies, like Nationwide and State Farm, offer instant discounts of 10% to 15% just for signing up for the telematics insurance program. They also promise not to increase drivers' premiums based on telematics driving data. Nationwide and State Farm made the top of the list of The Motley Fool Ascent's picks for best car insurance discounts for safe drivers

Here's how much drivers can save with usage-based car insurance from each of these companies:

• Nationwide SmartRide® telematics car insurance offers discounts up to 40% based on driving data
• State Farm Drive Safe and SaveTM offers discounts up to 30% based on driving data, and discounts could be higher in some states

Two of the best car insurance companies for telematics insurance, Nationwide and State Farm, promise not to raise premiums based on driving data. And these companies offer discounts of up to 30% to 40% for using telematics car insurance, depending on the state the driver resides in.

Drawback No. 3: Some telematics car insurance apps don't work well

By signing up for usage-based car insurance, drivers have to trust that their car insurance companies will track their driving data fairly and accurately. Unfortunately, some car insurance companies get low ratings for their mobile apps -- with drivers complaining about inaccurate records, getting penalized for using the phone while the car is parked, and other errors.

The best-ranked car insurance companies for telematics car insurance, like State Farm and Nationwide, have highly rated mobile apps. Make sure to read recent reviews before signing up for telematics car insurance; some companies' data-tracking apps are much better than others.

Why drivers should try telematics car insurance (despite drawbacks)

Car insurance doesn't have to feel like an out-of-control expense, careening off the road. Drivers have options to regain control of their car insurance costs. By shopping around for car insurance, especially from the best telematics car insurance companies like State Farm and Nationwide, drivers might reduce their monthly insurance bills by a significant amount.

Telematics car insurance is not available in every state from every company. But drivers who want to be proactive and make some savvy moves to cut their car insurance costs should strongly consider telematics car insurance. Consumers are already sharing so much of their personal data with companies every day; why not share a bit more driving data with the car insurance company that takes care of costs in case of a car crash?

Bottom line

Some drivers might think that telematics car insurance feels too intrusive or is too much of a hassle. But if drivers can show their car insurance companies why they are safe, low-risk insurance customers, telematics could help achieve cheaper car insurance for everyone. Usage-based car insurance could be a win-win for the future of car insurance.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .