While traditional auto insurance considers your past driving record when determining your insurance premiums, it doesn’t typically consider your current driving habits. So if you’re braking safely, following posted speed limits, and accelerating steadily, you probably aren’t seeing those behaviors pay off in the form of lower car insurance rates.

Usage-based insurance (UBI) is a kind of real-time insurance product that uses plug-in devices in policyholders’ vehicles to track driving patterns and other behaviors like phone use. For good drivers who follow safe driving habits, there can be a payoff for sharing that data in the form of lower premiums.

Usage-based insurance has become increasingly popular as consumers look for creative ways to cut costs amid rising rates nationwide.

Read on to learn what UBI is, how it works, how it impacts insurance costs, and the benefits and drawbacks of this insurance option.

Understanding usage-based insurance

Usage-based insurance programs track users’ driving behaviors, including how frequently they drive, helping to tie habits on the road into the cost of car insurance premiums. Not all insurers offer UBI programs.

Usage-based car insurance relies on telematics data to analyze a driver's habits. Telematics is a type of technology used to monitor and transmit information about driving performance remotely. To get this information, insurers may require drivers to plug an onboard diagnostics device, or OBD, into their vehicle, sync their car’s OnStar (or similar) system, or download a smartphone app.

Types of UBI programs

These are two common types of UBI programs. Details and rules vary by auto insurance company.

1. Pay-per-mile

With pay-per-mile insurance, also called pay-as-you-drive, your insurance costs are largely based on the number of miles you drive. In addition to charging a per-mile rate, many insurers charge a base rate with their pay-per-mile options. This base rate is determined using factors like your age, gender, and the type of car you drive.

2. Pay-how-you-drive

Pay-how-you-drive programs consider how many miles you drive and your behaviors on the road. Insurers will track things like your acceleration rate, braking habits, smartphone usage, and more to help determine the overall cost of your auto insurance policy.

How usage-based insurance works

Drivers who participate in a UBI program must install or download a telematics device that transmits data about their driving behaviors to their car insurance company.

The data may include acceleration and braking habits, miles and time of day driven, smartphone use behind the wheel, and whether drivers obey posted speed limits. Insurers rely on different devices, including plug-in or built-in options and smartphone apps, to track a car’s telematics data.

Your car’s telematics data is then transmitted to the insurance company through the onboard device or mobile app, and your insurer may assess your on-road behaviors during a trial period. Trial periods can vary in length by insurer.

At the end of your trial period, your insurer may offer you a discount if its assessment reveals you’re driving safely. Discounts may apply at your next policy renewal or even sooner, depending on your insurer. Certain insurers, like Metromile, offer a more dynamic pricing model that adjusts monthly based on how many miles you drive. Even if your trial period doesn’t turn out as expected, many insurers offer discounts for participating in a UBI program.

Here’s a look at potential savings through popular insurers.

Pros and cons of usage-based insurance

Pros

• Potential cost savings: It’s possible that if you drive infrequently or have safe habits on the road, you’ll save a significant amount on your auto insurance premiums.

• Incentive for safe driving: The potential cost savings can serve as a helpful incentive for developing and maintaining safe habits behind the wheel.

• Customized premiums: Instead of paying standard insurance premiums based on your driving record, demographic factors, and the car you drive, your insurance coverage will align with your driving behaviors and total mileage.

Cons

• Privacy concerns: Consumer advocacy groups have expressed concerns over a lack of transparency about how insurers use driver data. While many insurers say they don’t sell or share driver data, groups like the Consumer Federation of America are calling for more oversight.

• Data accuracy and fairness: Concerns about privacy and data have further led to some states attempting to establish regulations of telematics with the goal of ensuring data is accurate and reliable, and insurance companies are pricing premiums fairly.

• Limited flexibility for certain drivers: If you drive long distances or have established habits like accelerating quickly or hard braking, usage-based insurance probably isn’t for you.

Is usage-based insurance worth it?

Usage-based insurance likely isn’t worth it if you have a tendency to drive above the speed limit or engage in other high-risk behaviors on the road, such as texting while driving. But if you’re a low-mileage and relatively safe driver who obeys the rules of the road, it may be worth exploring a UBI program.

Doing so could help you save money on your insurance premiums, even just by signing up. Compare potential savings with popular insurers before moving forward with a program, as some insurance companies offer larger potential discounts than others. For instance, drivers who participate in Nationwide’s SmartRide program can get up to a 25% discount, while those who participate in Liberty Mutual’s RightTrack program can earn a 30% discount.

Besides driving habits and insurance rates, privacy preferences also play a role, as your insurance company will have access to your driving data, including your habits and overall mileage. When determining if a UBI program is right for you, it’s important to consider how you drive, how many miles you drive, and the privacy factor.

If a UBI program doesn’t seem like the best option, but you’re still interested in reducing your insurance costs, other avenues may be open to you. Many insurers offer discounts. For instance, you may be able to get a bundling discount if you bundle your auto and home insurance policy, a discount for paying your premiums annually, or special savings for having a car with certain safety features.