Auto Should I Consider Usage-Based Insurance for My Car?

These pay-as-you-drive policies are gaining ground and could help you save on auto insurance. But here’s what you need to know before putting the pedal to the metal.

By Millie Staff Liane Yvkoff
PUBLISHED 01/04/2023 | 6 MINUTES

The pitch from auto insurers is simple: If you’re a safe driver who doesn’t travel often or far, your auto insurance premium should be lower than the average commuter’s.

That’s the idea behind the increasingly popular “pay-as-you-drive” car insurance policies, the prices of which are essentially determined by your individual driving habits. And with the median new auto loan payment surpassing $700 in 2022, these products—with their touted annual savings—are looking more and more appealing to consumers who want to lower the cost of car ownership.

But beware: These programs may not be right for everyone, and it’s not always clear how much drivers will save when they trade their privacy for a policy discount.

What Is Usage-Based Insurance?

Usage-based insurance (UBI) is a car insurance policy that is based on the driver and uses data generated by a vehicle’s telematics system (a device that measures telecommunications and informatics, or information science) to determine the owner’s auto insurance premium.

To tabulate the policy’s price, underwriters typically look at what kind of car the applicant drives (like a minivan or sportscar), if they have a clean driving record and their estimated annual driving distance. They might also inquire about an applicant’s demographics, such as age, education level, homeownership status, relationship status and credit score—though industry analysts have noted that these socioeconomic formulas aren’t accurate predictors of risk and often unfairly result in higher premiums for minorities and low-income customers.

How Does It Work?

Vehicles collectively generate trillions of data points as they operate. Insurance companies access this information by using built-in telematics systems, adding a device to the vehicle’s on-board diagnostics port or through smartphone apps paired with a physical sensor attached to the vehicle.

AI-powered algorithms mine this data to predict the likeliness that a customer will file an insurance claim based on factors such as how fast they drive, how hard they brake and where and when they travel.

Using this model, drivers who follow the rules of the road and limit how much they travel may receive a lower rate.

Is It Worth It?

Predicting potential savings by switching from an annual to a pay-as-you-go policy is difficult because each insurer uses its own formula, and the policies vary by state.

Progressive was one of the first companies to embrace telematics, and marketing for its Snapshot program claims that participating consumers save an average of $156 a year.

But “we have no idea if their evidence is accurate,” says Michael DeLong, a Consumer Federation of America research and advocacy associate. “One of the major problems with telematics is that, in most states, there is limited oversight of these programs.” While nine of the top 10 insurers offer usage-based insurance, states often don’t have the rules and regulations needed to adequately protect consumers.

Another aspect to consider is that, depending on the state and company, data may be sold to or shared with third parties without the consumers’ knowledge, and this information is often undisclosed or difficult to locate. As such, DeLong warns consumers to proceed with caution, do their own research and possibly consider pay-per-mile programs instead.

What Are Pay-Per-Mile Programs?

Mileage-based programs (another type of UBI) use the distance a vehicle travels to calculate a new premium each month.

Metromile, for example, which was recently acquired by Lemonade, charges a monthly base rate plus an additional $0.06 per mile, up to 250 miles per day. Drivers who travel less than 10,000 miles in a year are likely to save money with this type of program, but lifestyle and travel changes are inevitable, and driving more than estimated in a month may result in higher than usual premiums.

The program is also only available in a handful of states, so it’s not a viable option for many shoppers.

How Do I Get Started?

If you’re thinking of switching to a UBI program, here are some things to consider first:

Shop around. Premiums will vary between insurers, and drivers with good credit can save an average of $150 per month by switching to the cheapest insurance plan in their state.

Try before you buy. Many pay-as-you-go companies allow drivers to try the service for several days to estimate how much their premium would be based on their mileage and driving behavior. If you don’t save money during the trial period, telematics-based insurance isn’t right for you.

Read the fine print. Again, it’s important to understand what kind of data is monitored by the insurance company and which factors are being used to calculate your rates. Check with the company to see how this personal information will be used and if it will be shared with third parties.

Ask about alternate programs. Companies like Lemonade offer discounts for driving a hybrid or electric vehicle regardless of how much you travel, and most insurers offer a discount if you bundle auto with homeowners’ or renters’ insurance.

Millie content is licensed from Dotdash Meredith, publisher of Millie, Real Simple, InStyle, Investopedia, The Balance and more.

Liane Yvkoff is an automotive technology and lifestyle writer covering alternative powertrains, transportation startups, next-generation infotainment systems and basically anything that could “disrupt” your daily commute. Their work has appeared in,,, and several print and online publications, including, Popular Mechanics and Penthouse.


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