How Does Usage-Based Insurance Work?

UBI ties your car insurance rates to how, when, where, and how often you drive.

Daria Kelly Uhlig
Daria Kelly Uhlig
  • Licensed Realtor with 10+ years in personal finance content

  • Contributor to Nasdaq and USA Today

Daria is a licensed Realtor and resort property manager specializing in personal finance, real estate, and insurance topics. In her spare time, she practices photography.

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Evelyn Pimplaskar
Evelyn PimplaskarEditor-in-Chief, Director of Content
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Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.

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Mark Friedlander
Reviewed byMark Friedlander
Mark Friedlander
Mark FriedlanderDirector, Corporate Communications
  • Corporate communications director for Insurance Information Institute

  • 20+ years in insurance and communications

As Director, Corporate Communications for Triple-I, Mark serves as the non-profit’s national spokesperson, sharing information and education on a wide array of insurance issues.

Updated September 4, 2023 at 5:00 PM PDT

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Usage-based car insurance 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, and other factors.

Also referred to as pay-as-you-drive, pay-how-you-drive, or telematics insurance, UBI rewards drivers who allow their insurer to collect their driving data in real time in exchange for the opportunity to receive discounted rates. You might benefit from UBI if you’re a careful, defensive driver — especially if you’d otherwise be considered high-risk because of your age or inexperience behind the wheel. But some insurers could increase your rates if telematics detect poor driving habits.

UBI is a rapidly growing market, and nine out of the top 10 U.S. auto insurers by market share have usage-based programs, according to the Insurance Information Institute.[1]

Quick Facts
  • Usage-based insurance ties your premiums to your actual driving.

  • Also known as “pay-as-you-drive,” UBI is gaining popularity, with many top insurers now offering it.

  • UBI can be good for people who don’t drive a lot or who are defensive drivers with clean driving records.

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How usage-based insurance works

UBI uses technology to objectively measure a variety of driving behaviors. The insurer 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 called 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 usually located 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.

Learn More: Telematics Car Insurance: What to Know

Learn More: Telematics Car Insurance: What to Know

Phone app

Telematics smartphone apps eliminate the need for a separate device. The apps use your phone’s GPS and sensors to track times, locations, distances, turns, acceleration, braking, speed, and even phone use the latter of which might be problematic if you talk on the phone while driving.

Types of usage-based insurance

The two types of usage-based insurance are pay-how-you-drive insurance and pay-as-you-go insurance. While both involve the use of data to assess risk and calculate insurance rates, they differ in the specific types of data they measure.

Pay-how-you-drive insurance

Pay-how-you-drive insurance calculates rates based on your driving skill and behaviors whether you drive the speed limit, how smoothly or aggressively you accelerate and brake, how fast you take turns, and other factors you control. It may also look at when you drive for example, rush hour, when roads are likely to be congested, versus off hours, when fewer drivers share the road.

Pay-how-you-drive insurance can save you money if you’re a careful driver. An additional benefit is that you can use the feedback to improve your skills, if necessary, and further reduce your premium.

Here’s a look at pay-how-you-drive programs from a number of auto insurance companies.

ProgramReview Period LengthActivities Tracked
Allstate Drivewise
  • 6 months
  • Location
  • Phone activity
  • Speed
  • Braking
  • Driving hours
American Family Insurance KnowYourDrive
  • 12 months or policy term
  • Speed
  • Vehicle usage
  • Braking
  • Acceleration
  • Time of day
  • Phone use (distracted driving)
Farmers Signal
  • Policy term
  • Time of day
  • Miles driven
  • Speed
  • Braking
  • Phone use
Liberty Mutual RightTrack
  • 90 days
  • Braking
  • Acceleration
  • Time of day
  • Frequency at lower speeds
  • Distracted driving
Nationwide Insurance SmartRide
  • Program lasts four to six months
  • Discount calculated weekly
  • Final discount applies to next policy renewal
  • Miles driven
  • Braking and acceleration
  • Idle time
  • Nighttime driving
Progressive Insurance Snapshot
  • 30 days
  • Discount applied upon renewal
  • Braking and acceleration
  • Time of day
  • Amount of driving
  • Phone use
Root Insurance
  • Up to 30 days
  • Braking
  • Turning
  • Time of day
  • Focused driving
Travelers Insurance IntelliDrive
  • 30 days
  • Time of day
  • Speed
  • Acceleration
  • Braking
  • Distractions
  • Mileage
Safeco RightTrack
  • 90 days
  • Miles driven
  • Nighttime driving
  • Braking
  • Acceleration
State Farm Drive Safe & Save
  • Ongoing
  • Discount calculated every six months
  • Mileage
  • Acceleration
  • Braking
  • Cornering
  • Phone use
  • Speed
USAA SafePilot
  • Ongoing
  • Begins after 14th day of enrollment and continues through policy term
  • Hours driven
  • Location
  • Time of day
  • Passenger/driver
  • Phone use
  • Braking

Pay-as-you-go insurance

Pay-as-you-go insurance bases your premiums on how many miles you drive over a given period. Because that figure varies from one period to the next, so do your premiums. That means you’ll pay less when you drive less, which can save you money.

Hugo Car Insurance is one example of a pay-as-you-go auto insurance company. It offers a Flex plan with on-demand coverage that you can stop and start whenever you want. The only stipulation is that you purchase at least three days’ worth at a time. However, you don’t have to use the coverage on consecutive days you can save your days to use on the days you drive.

Keep Reading: Pay-Per-Mile Car Insurance Guide

Keep Reading: Pay-Per-Mile Car Insurance Guide

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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.

ProgramPotential SavingsAvailability
Allstate DrivewiseVaries by stateAll states except California
American Family Insurance KnowYourDrive
  • 10% for signing up
  • 2% to 20% after initial policy term
  • Flexes throughout term based on driving behavior
All states served by American Family except Utah
Farmers Signal
  • 5% for signing up
  • Up to 15% on policy renewals

All states except Florida, Hawaii, New York, and South Carolina;

Signal is available in California but discount is not

Liberty Mutual RightTrack
  • 10% for signing up
  • Up to 30%
All states except California, but program differs slightly in Illinois, Ohio, and New York
Nationwide Insurance SmartRide
  • 15% for signing up
  • Up to 40%
Open to all Nationwide customers except those in Arkansas, California, Hawaii, Louisiana, and New York. Program criteria differ in California and North Carolina.
Progressive Insurance Snapshot
  • Varies by state
  • Average savings amount to $156 per year
Not available in California. Available in 49 states and Washington, D.C.
Root InsuranceUp to 30%Available in all states except Idaho, Michigan, Minnesota, North Carolina, South Dakota, Washington, and Wyoming; other states coming soon
Travelers Insurance IntelliDriveUp to 30%In 43 states, but program offerings and details may differ
Safeco RightTrackUp to 30%Available in some states; contact a Safeco agent for availability and program information
State Farm Drive Safe & SaveUp to 30%Not available in California, Massachusetts, or Rhode Island
USAA SafePilot
  • Up to 10% for signing up
  • Up to 30% at renewal
Available in select states; contact a USAA agent for availability information

Advantages 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 are based on driving — not risk classes such as age, education, or experience — so you have 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.

Disadvantages of usage-based insurance

UBI has some disadvantages you should consider before you sign up:

  • The UBI device or 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 policy term, which makes budgeting difficult.

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Usage-based insurance FAQs

UBI is a new concept for many drivers, so there’s a good chance you have questions about this type of insurance and whether it’s a good fit for you.

  • What’s the difference between usage-based insurance and pay-per-mile insurance?

    Pay-per-mile insurance is a type of usage-based insurance because the insurer bases your rates on your driving rather than on risk factors, such as age and driving experience. Specifically, it looks at how much you drive and adjusts your rate accordingly, increasing it when you drive more and decreasing it when you drive less.

  • How can you save on car insurance if you have a good driving record?

    Insurance companies give customers a number of ways to leverage their good driving record for savings. In addition to UBI programs that discount premiums for customers who practice safe driving habits, insurers typically offer good driver discounts for those who have clean driving records. Shop around to make sure your insurer offers UBI discounts in addition to, and not instead of, other discounts you qualify for.

  • Can your rates increase with usage-based insurance?

    Some auto insurance companies increase rates based on data they collect for UBI, but many don’t. However, 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.

  • Can you still get a good driver discount if you don’t participate in a usage-based insurance program?

    That could depend on your insurance company, but typically, yes. Many insurance companies offer good driver discounts outside of UBI programs.

  • Is usage-based insurance cheaper?

    Usage-based insurance can be cheaper for some customers. If you drive infrequently, for example, and you’re a cautious driver who’s careful not to exceed speed limits and avoids aggressive acceleration, braking, and cornering, you might save money with a UBI policy. UBI can also save you money if you’re in a risk class that typically pays high premiums, such as a young driver.

  • What is telematics, and how does it work?

    Telematics is the technology behind UBI that tracks your driving behavior. Whether it consists of a built-in device (such as OnStar), a plug-in dongle, or a smartphone app, telematics measures where, when, and how far you drive, as well as your speed, braking, acceleration, cornering, and phone use. Exact activities measured vary by insurer and program.

Sources

  1. Insurance Information Institute. "Background on: Pay-as-you drive auto insurance (telematics)." Accessed June 13, 2023
  2. Progressive Insurance Company. "Snapshot Test Drive." Accessed June 13, 2023
Daria Kelly Uhlig
Daria Kelly Uhlig

Daria Uhlig is a freelance writer and editor with over a decade of experience creating personal finance content. Her work appears on USA Today, Nasdaq, MSN, Yahoo Finance, Fox Business, GOBankingRates and AOL. As a licensed Realtor and resort property manager, she specializes in real estate topics, including landlord, homeowners and renters insurance. In her spare time, Daria can be found photographing people and places on Maryland's Eastern Shore. Connect with her on LinkedIn.

Evelyn Pimplaskar
Edited byEvelyn PimplaskarEditor-in-Chief, Director of Content
Evelyn Pimplaskar
Evelyn PimplaskarEditor-in-Chief, Director of Content
  • 10+ years in insurance and personal finance content

  • 30+ years in media, PR, and content creation

Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.

Featured in

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Mark Friedlander
Reviewed byMark FriedlanderDirector, Corporate Communications
Mark Friedlander
Mark FriedlanderDirector, Corporate Communications
  • Corporate communications director for Insurance Information Institute

  • 20+ years in insurance and communications

As Director, Corporate Communications for Triple-I, Mark serves as the non-profit’s national spokesperson, sharing information and education on a wide array of insurance issues.

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