What is usage-based insurance?

Woman with a usage-based insurance plan driving her daughter to school in the morning Image: Woman with a usage-based insurance plan driving her daughter to school in the morning

In a Nutshell

With usage-based insurance, an auto insurance company calculates your premium based on your driving behavior. The company uses a telematics device — such as a plug-in device or mobile application — to track factors like your mileage and speed. If you’re a safe driver, usage-based insurance could lower your auto insurance rates.

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If you’re a safe driver and willing to prove it by having your insurer monitor your driving habits, you may be able save on your auto insurance.

Usage-based insurance, or UBI, is a newer type of auto insurance that looks at additional factors, like how many miles you drive or how safe of a driver you are, to determine your premium rates. If you typically drive short distances or stick to the speed limit, for example, you might find you qualify for a lower premium with UBI versus traditional auto insurance.

UBI became available in the U.S. around 10 years ago, and more than 8 million UBI policies were in effect in the United States in 2018, according to the market research firm Ptolemus Consulting Group. Depending on your driving habits, UBI may or may not be a good fit for you.

Let’s take a look at how usage-based insurance works, what the various types are and what factors to consider if you’re trying to decide whether to opt for UBI.


How does usage-based insurance work?

While traditional auto insurance may use factors such as your age, location and insurance score to determine your premium, usage-based insurance also considers your driving habits to calculate how much you’ll pay for coverage.

UBI can be a win-win for both insurance companies and drivers. Some drivers can snag a lower premium with UBI than with traditional insurance, while insurance companies benefit by motivating policyholders to drive more safely.

“How much you save depends on the plan and how you drive, naturally, but typically, you can reduce your rate by 10% to 30%,” says Penny Gusner, an analyst for Insurance.com and CarInsurance.com.

With a UBI program, your insurance company will track your mileage and/or driving habits with telecommunication devices called telematics. Data may be collected and sent to your insurance company through a self-installed plug-in device, a mobile app or equipment already installed in your vehicle by the manufacturer.

“Telematics uses cellular, GPS and other technology to collect information on how motorists drive, and tracks time of day and vehicle speed, how many miles you drive and sudden changes in speed, or how often you brake hard or accelerate significantly,” Gusner says. “Some also track how much you idle. Still others may also include “cornering” (how you take a corner) and phone use behind the wheel.”

The information an insurance company collects is based on the type of UBI program it offers.

Types of usage-based insurance

Usage-based insurance generally falls into two categories. One type of UBI monitors driving behaviors such as mileage, the time of day you drive and changes in speed. These may be referred to as pay-how-you-drive programs. The other type only tracks how many miles you drive and may be called pay-as-you-drive, or PAYD, pay-as-you-go or pay-per-mile plans.

UBI programs that track driving behaviors

UBI programs that track driving behavior generally collect data for a specific period of time — typically until your next policy renewal — to establish your habits and discount your premium, if you qualify. Some may also give you an immediate discount of 5% to 10% when you sign up for the program.

With some insurance companies, such as Progressive, your premium may increase through its UBI program. But other companies, including Nationwide, promise that their UBI programs can only discount your rate.

UBI programs that track mileage

With UBI programs that track only mileage, the company will often charge you a monthly base rate plus a per-mile charge.

Keep in mind that an insurance company’s UBI program details may vary by state or not be available in certain states.

Which insurance companies use telematics?

Here are brief summaries of usage-based programs offered by some insurance companies.

  • Progressive Snapshot — The Snapshot device or mobile app tracks your mileage, the time of day you drive and how you drive.
  • State Farm Drive Safe & Save — The mobile app measures behaviors like acceleration, braking, cornering, speed and distracted driving.
  • Allstate Drivewise — The mobile app tracks your speed, braking and the time of day you drive to determine your cash back.
  • Nationwide SmartRide — The app measures miles driven, hard braking, acceleration, idle time and night-time driving.
  • Travelers IntelliDrive — The app captures the time of day you drive, along with your speed, acceleration and braking.
  • Esurance DriveSense — The app measures a range of driving behaviors, such as miles driven at high speeds, hard braking and major speed changes.
  • Metromile — The app uses a base rate and the number of miles you’ve driven to determine how much you pay for coverage each month.

Check with your insurance agent or the insurance company for more details on these programs.

Should I get usage-based insurance?

Think about these factors to help determine if a usage-based insurance program might be a fit for you.

Consider your driving habits

If you’re a safe driver, you may be able to get a lower premium with a UBI program. You may also be able to save money if you’ve made one or more previous accident claims. UBI plans measure driving in real time using telematics and may not rely as much on historical data like your driving record.

When shopping for a UBI policy, look at all of the factors each company monitors and weigh them against your driving habits. For example, if you drive to a late-shift job every night, you may not save much (or any money at all) with a UBI plan that measures the time of day you’re driving — some insurance companies consider daytime driving to be safer.

The National Association of Insurance Commissioners’ DriveCheck tool could help you get a sense of whether you might benefit from UBI.

Consider how comfortable you are with data collection

You should also consider whether you’re willing to trade potentially lower auto insurance premiums for privacy. Having your driving habits, mileage and phone use monitored may or may not be worth the potential savings for you.

Before you sign up for a UBI program, Gusner says, make sure you know exactly what the plan monitors and who — if anyone — the company shares the data with.


What’s next?

If you’re a safe driver or work remotely, have a short commute or just don’t drive much in general, usage-based insurance could help bring down your auto insurance rates.

Be sure to shop around and compare programs to understand what data the insurance company collects, how much you could potentially save and how the program works in your state.


About the author: Jennifer Nelson is a freelance content marketing writer and ghostwriter who specializes in health, home and money. She writes for AARP, Costco Connection, NextAvenue.org, Realtor.com, We… Read more.