What Is Usage-Based Auto Insurance?

Traditional auto insurance rates are calculated using a complex formula that takes your driving record, age, type of car, location and other factors into account.

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If you're shopping around for auto insurance rates, you may have come across a different option called usage-based auto insurance — sometimes called UBI for short. Find out more about this usage-based insurance option below.

What Is Usage-Based Car Insurance?

Usage-based car insurance is a type of auto insurance with premiums that are calculated based on your driving habits. These plans are sometimes called "pay how you drive" insurance. In addition to the typical factors that determine auto insurance premiums, such as location and your age, usage-based insurance looks at additional factors, particularly how often and how safely you drive.

If you usually drive short distances, stick to the speed limit and stop at all stop signs, you might qualify for lower premiums through usage-based insurance plans.

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How Does It Work?

UBI programs typically work like this: The insurer gives you a plug-in device or mobile app, and it monitors your driving habits for a period of a few months. After the program concludes, the insurer collects all the data it gathered from the plug-in device or app and uses it to calculate your premium. Guidelines and actual savings vary by insurer.

The device (or mobile app) looks at driving behavior such as acceleration, braking, speed, how quickly you take turns and whether you're distracted while driving. UBI programs consider things like hard braking, rapid acceleration and taking turns too fast to be negative driving behavior, and these things may actually increase your premium should you choose to enroll in such a program. Keep in mind that the plug-in device doesn't know when you're driving defensively, such as swerving around an obstacle in the road or stopping short to avoid a collision.

UBI programs also reward drivers who don't drive that often. Commuters and people who enjoy taking long road trips may not be good candidates for usage-based auto insurance.

Benefits of Usage-Based Insurance

From the auto insurer's perspective, usage-based insurance helps more accurately measure your risk of an accident. Here are some benefits from the consumer perspective when enrolling in these programs:

• Potentially lower premiums: If the data the insurance company collects reflects good driving habits — gradual acceleration, sticking to the speed limit, braking gradually and staying off your phone — it's possible you might be quoted lower premiums.
• Safer driving: If drivers know they're being monitored, they're more likely to use safe driving habits. Usage-based programs may provide drivers with feedback they can use to help improve driving habits over time.
• Tracking accidents: After an accident, tracking what occurred leading up to the incident may be easier if a UBI device is being used in the car.

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How Much Does Usage-Based Insurance Cost?

The cost varies by insurance provider, location and your personal driving profile (age, gender, driving record, etc.). It's a good idea to compare rates from multiple companies when shopping around for auto insurance to ensure you're getting the best rate possible in your area.

Pay-as-You-Drive Car Insurance

Another type of usage-based auto insurance is pay-as-you-drive insurance, which means your premium costs are based on how far you drive. Many companies charge a monthly rate plus a per-mile charge. These types of plans aren't available in all states, so check with your insurance provider to see if this is an option for you.

How Does the Cost Compare to Conventional Auto Insurance?

It's difficult to compare the cost of usage-based insurance with conventional auto insurance because so many factors are at play, including location. Car insurance rates vary by state, so overall savings depend on where you live and whether you think your driving habits are generally safe. Some research suggests that drivers may save 10% to 40% on premiums, depending on the company they choose.