Usage-Based Insurance: Benefits, Drawbacks and How It Works
Usage-based insurance programs from insurers collect driving habits data to assess risk and determine premiums and discounts.
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Usage-based car insurance (UBI) bases premiums on a driver’s habits behind the wheel. It relies on devices that measure driving behavior, when and where you drive, how far you drive, personal information, and other factors.1
Also referred to as pay-as-you-drive, pay-how-you-drive, or telematics insurance, UBI rewards drivers who allow their insurance company to collect their driving data in real time. In exchange, drivers get the opportunity to receive discounted rates.
You might benefit from UBI if you’re a careful, defensive driver — especially if insurers would otherwise consider you high risk because of your age or inexperience behind the wheel. But some insurance companies could increase your rates if telematics detects poor driving habits.
UBI is a rapidly growing market, and all the top 10 U.S. auto insurers by market share offer usage-based programs.
How usage-based auto insurance works
UBI uses telematics technology to objectively measure a variety of driving behaviors. The insurance company uses the resulting data to determine how risky you are to insure and then calculates your premiums accordingly.
The precise data collected varies by insurer and may be subject to state regulations, but auto insurance companies commonly look at these factors:
How far you drive
How frequently you drive
How fast you drive
How you accelerate and brake
How fast you take turns
How you use your phone while driving
Traffic congestion and other hazards along the routes you travel
Weather and other environmental factors
The technology used to measure your driving habits and other risk factors is telematics, and it can take one of two forms: an installed device or a phone app.
Installed device
Some cars have built-in telematics, such as OnStar or ConnectedDrive, that collect data. Your insurer might be able to connect to these systems to access the information.
Cars that don’t have a pre-installed device can use a small telematics dongle that plugs into the onboard diagnostic port, also called the OBD-II port, which is typically at the base of the steering column or under the dashboard. The dongle records data from your car’s computer system and sensors, similar to how black box flight-data recorders collect data from airplanes.
Progressive’s Snapshot plug-in device is one example of a telematics dongle.2 After a specific monitoring period, Progressive takes the device back and analyzes the data to determine whether the driver is eligible for a discount.
Phone app
Many auto insurance companies use mobile apps to track customer driving habits, promising savings for the customers who utilize these apps. Telematics smartphone apps eliminate the need for a separate device.
Here are a few examples of major car insurance companies that offer telematics programs via phone apps.
State Farm: The Drive Safe & Save program uses the State Farm mobile app to track your driving habits, offering discounts of up to 30% based on your performance, with savings just for signing up.
Allstate: Available through the Allstate mobile app, Drivewise offers a personalized auto insurance rate, rewarding you with lower costs for safe driving habits.
GEICO: DriveEasy monitors your driving through the GEICO mobile app and provides savings based on safe driving habits, promoting safer roads for everyone.
Benefits of usage-based insurance
Usage-based insurance has a number of benefits that make it a good choice for many drivers:
Safe driving habits can earn you a significant discount on your premiums.
Insurance premiums depend on your driving habits, so you have some control over how much you pay.
Some plans include crash detection, which not only senses when you’ve had a crash but also helps you get emergency assistance and file a claim.
Potential drawbacks of usage-based insurance
UBI has some disadvantages compared to a traditional auto insurance policy you should consider before you sign up:
The UBI device or mobile app tracks where you go, when you drive, and how you use your phone. Some drivers might be uncomfortable sharing that private data.
With some programs, the evaluation could increase your rate if your driving habits are risky.
Premiums can change during your insurance policy term, which makes budgeting difficult.
How much you can save with usage-based insurance
The good news is that many UBI programs don’t increase your rates based on the driving data collected upon entering a program, so you stand to save if you enroll. How much you save varies by program. But some companies, including GEICO and Progressive, could raise your rates if their telematics uncovers poor driving habits.
How car insurance companies determine usage-based insurance premiums
UBI premiums rely on real-time data collected through telematics technology rather than the mileage estimates traditionally provided by customers. But car insurance companies still also factor in classic criteria when determining premium rates.
Learn more about the factors insurance companies consider for usage-based insurance premiums.
Mileage: Telematics tracks the exact distance you drive, ensuring that premiums reflect your actual road usage rather than an estimate of the distance you drive.
Driving behavior: Insurers monitor habits like acceleration, braking, speed, and cornering to assess how safely you drive. Consistently safe driving can lead to lower premiums.
Driving location and time of day: Frequent travel in high-traffic or accident-prone areas can increase premiums, while driving in safer regions may lower them. Insurers will also likely view you as a less risky driver if you reduce your driving time at night.
Age: Insurers consider younger drivers, especially teenagers and drivers younger than 25, as higher risk due to their limited experience and higher likelihood of accidents. As a result, premiums for this age group tend to be higher.
Driving record: Your insurer will still likely consider your driving record and claims history when determining your base insurance premiums. Having a history of one or more driving incidents typically leads to higher premiums.3
How to maximize savings with UBI programs
When you use a UBI program to save money, you must practice safe driving habits, or you risk missing out on valuable savings. To get the most out of a UBI program, consider the following tips:
Is usage-based insurance right for you?
Whether or not usage-based insurance is right for you depends primarily on how much you plan to drive. If you work from home, live in a walkable city, or are about to retire, you may find you don’t plan to drive much at all.
People who have lengthy commutes, travel a lot to see friends and family, or live outside of the city center may find that traditional auto insurance is the better option for them.
Usage-based insurance FAQs
The following insight into how usage-based insurance works can help answer your remaining questions about this car insurance type.
Car insurance companies can track your phone, but only with your permission and within specific parameters. Many usage-based insurance programs — like State Farm’s Drive Safe & Save, Allstate’s Drivewise, or GEICO's DriveEasy — rely on telematics technology integrated into a mobile app. These apps collect data to monitor your driving behavior, such as speed, braking, acceleration, and even phone usage while driving.
Progressive Snapshot can tell if you’re using your phone while driving, but it can’t see who you’re contacting or access your communications. The mobile app only tracks phone usage during trips to evaluate driving habits.
You can technically lie about how many miles you drive when updating your car insurance policy, but doing so comes with a lot of risk. If you misrepresent your mileage, you risk having future claims denied or having your policy canceled. You shouldn’t lie about your mileage.
Usage-based insurance can be cheaper for some customers. For example, infrequent and cautious drivers who follow speed limits and avoid aggressive acceleration, braking, and cornering might save money with a UBI insurance policy. UBI can also save you money if you’re in a risk class that typically pays high premiums, such as a young driver, yet you demonstrate safe driving practices.
Many popular car insurance companies utilize usage-based insurance to help customers save on premium rates, including the 10 largest U.S. auto insurance companies by market share: State Farm, Progressive, GEICO, Allstate, USAA, Liberty Mutual, Farmers, American Family, Travelers, and Nationwide.
Some auto insurance companies increase rates based on data they collect for UBI, but it depends on the company. Even if your company doesn’t increase rates after the initial evaluation period, you might see an increase if your driving habits change from one evaluation period to the next. That’s of particular concern if you pay as you drive. Switching from remote work to working on site, or moving to a location that results in a longer commute, could increase your rates.
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