What is usage-based insurance & is it right for you?

Auto insurance is becoming increasingly customizable, including coverage based on how you drive.

Usage-based insurance, or UBI, is a form of auto insurance that changes the premium based on how you drive. Many insurers now offer UBI programs aimed at safe drivers that offer lower insurance premiums in exchange for good driving habits. 

Can usage-based insurance really save you money?

Discounts for safe driving or reduced mileage vary from insurer to insurer, but the average discount is 5% to 15%, with the maximum possible discount varying from 20% to 50%. Some insurers offer savings immediately upon enrolling, while others ask you to drive for a period of time before providing a discount.

Many insurers offer UBI programs that can only reduce your premium, not increase it. While your discount may vary each month depending on how you drive, it will not exceed a predetermined level. Others reserve the right to increase your premium if they determine you're not driving safely enough.

How does usage-based insurance work?

Traditionally, calculating insurance premiums involves reviewing various factors to determine how risky a driver might be behind the wheel. Age, sex, location, accident history, and other factors go into the calculations.

With UBI, your premium may start based on these factors, but is then adjusted according to actual measurements of your driving habits. The data points collected vary between insurers and may include things like:

• How fast you drive compared to the speed limit
  
• How hard you brake
• The times of day you drive
• How many miles you drive

UBI plans may look at additional factors, such as how fast you take a corner, how often you sit idle, and whether you use your phone while driving. These days, data is generally collected by a smartphone app, rather than the car-connected dongle that early UBI programs used.

Some insurers offer UBI programs that only look at mileage rather than safe-driving habits. These kinds of UBI policies can save money for drivers with short commutes or who otherwise drive fewer miles than average.

UBI programs that focus on safe driving usually don't factor the number of miles driven into the "good driving" discount, though they may still use mileage to put other data in context.

Who benefits from UBI?

• Drivers with good habits already. Driving history alone is an imperfect measure of how you drive—there's no guarantee that drivers with unsafe habits will be in a crash or get a ticket. UBI allows safe drivers to more quickly demonstrate that they're a lower risk to insure and deserve lower premiums. 
• Drivers who could be driving more safely. UBI programs offer an opportunity to drivers with room to improve: Lower the odds your insurer will have to pay out because you were in a crash, and your insurer will lower your premiums. Feedback from a driving score and an understanding of what factors go into it helps these drivers improve their skills while also saving money.
• Good drivers with a recent accident history. Drivers might benefit from UBI if they have prior accident history but generally demonstrate good driving habits. UBI programs don't look at past driving as much as other types of insurance do, so they can be a good option to get a better rate with a less-than-stellar driving history.
• Insurance companies: UBI allows insurers to more confidently offer lower rates to drivers they know are low-risk, who are the customers that insurers want most. Insurers can then shift more of the cost of insurance onto those drivers who are responsible for more of the risk.