What Is Usage-Based Car Insurance?

The insurance industry has been offering usage-based automobile insurance (UBI), also known as pay how you drive insurance (PHYD) or pay as you drive insurance (PAYD), for over a decade. For some drivers, switching to a UBI program can mean substantial savings.

What Is Usage-Based Insurance?

Usage-based insurance has changed how underwriting works. Insurers reward good driving with lower rates on the assumption that better drivers are likely to be involved in fewer car accidents and file fewer claims. Traditional underwriting methods determine premium costs by assessing drivers based on aggregated data, such as driving records, insurance scores, and demographic categories like age, gender, and marital status.

Usage-based insurance, on the other hand, electronically tracks individual driver behavior and transmits the collected data wirelessly, allowing policies to be priced based on how well the individual policyholder drives, not how well other people in their demographic drive.

Tracking Your Driving Behavior

Telematics has gone from a niche product to mainstream over the past decade. More than 21 million U.S. drivers shared telematics data with their insurer in 2024, up roughly 28% a year since 2018. Most large carriers run a UBI program, including Progressive (Snapshot), Allstate (Drivewise), State Farm (Drive Safe & Save), Geico (DriveEasy), and Liberty Mutual (RightTrack). California is the major exception. Proposition 103 effectively prohibits telematics-based pricing in the state, although AB 1833 introduced in 2025 would carve out a voluntary opt-in framework if it eventually passes.

Usage-based insurance relies on driving data transmitted from a small on-board diagnostic device (OBD-II) or, more commonly today, a smartphone app installed on your phone. Every car and light truck built and sold in the United States after January 1, 1996 is equipped with an OBD-II diagnostic port for use with diagnostic devices. Smartphone-based programs have become the dominant data source for new enrollments because they require no hardware install, though some carriers still ship a plug-in device or a Bluetooth tag for higher-accuracy tracking.

When you purchase UBI, the insurer normally charges you an up-front fee if you need a device and then gives you a quote for your annual premium. Adjustments to the premium usually occur annually, although some companies offer monthly adjustments if their state permits it.

Drivers can access their driving data online or through an app to monitor their performance and make adjustments to earn discounts. Policyholders can usually opt out of a UBI policy at any time without penalty.

What Do Insurers Track?

Insurance companies use telematics to track driving patterns such as speed, acceleration, braking, distance traveled, time of day driven, and cornering. Newer programs also flag handheld phone use while driving, which is one of the heaviest penalties in most scoring algorithms. If you tend to drive during peak hours or at high speeds, your premium will be higher than it would be if you drove short distances and traveled at or under the speed limit.

Potential Benefits

Safe drivers could see immediate savings without having to spend years building a positive driving history. This is especially welcome news for young drivers, who often pay the most for automobile insurance and are typically very comfortable with technology. A 2024 J.D. Power study found that more than half of drivers under 35 say they would switch insurers to access a UBI program.

Drivers also see the results quickly, especially if their state allows monthly premium adjustments. Drivers whose premiums are high as a result of traffic violations can reduce them by adjusting their driving habits and demonstrating safer behavior on the road.

UBI policies are also advantageous for those who drive outside peak hours or do not drive many miles, since these safer driving tendencies have, until now, been invisible to insurers. Industry data from late 2025 puts the average yearly savings at around $231 for Progressive Snapshot users, $195 for State Farm Drive Safe & Save, and $180 for Allstate Drivewise. Allstate advertises a maximum discount of 40%, the highest cap of any major program.

Monitoring itself encourages safer, smarter driving, which has the potential to make the roads a lot safer. This is especially so as UBI increases in popularity and drivers know that their conduct behind the wheel will directly affect their insurance costs. Telematics can also promote safer driving by allowing parents to monitor their children’s driving behavior.

The data collected from tracking driver behavior also helps insurers combat insurance fraud, review accident data, and improve prevention measures against theft. All of this lowers the likelihood of policyholders filing claims, which translates to lower premiums.

Business owners with a fleet of vehicles can also enjoy benefits beyond lower rates, such as improved fleet safety and security, stolen vehicle tracking, and emergency crash response.

Important Considerations

Those interested in purchasing UBI should review the policy carefully so they understand what data the insurer tracks and whether they limit data collection. Without restrictions in place, telematics can collect almost any vehicle-related data. Privacy legislation may or may not protect you in your state, so it is extremely important that you understand what you are buying into.

You’ll want to know who can access your data and what measures the insurance company uses to protect it. Some states, but not all, have legislation that requires insurers to disclose their tracking practices and devices. The FTC finalized a consent order in early 2026 banning General Motors from selling driving behavior and location data to consumer reporting agencies for five years, after a complaint alleged GM had been doing this without driver consent. That case is a useful reminder that telematics data has commercial value well beyond your insurance file.

Telematics tracks behavior, but it does not track the causes of that behavior. For instance, if you slam the brakes because a child runs across the road, the tracking device will record your abrupt braking but not the reason that justified it. If you’re considering a UBI policy, you’ll want to inquire about how they will interpret your data, whether they will penalize you for occasional or unusual incidents, and whether there is an appeal or review process if you want to challenge a premium increase.

Also, be sure to check the period used to calculate your premium (monthly, bi-annually, or annually) so you can anticipate adjustments. Some policyholders will discover that a UBI policy costs them more than ordinary automobile insurance, so you’ll want to be able to withdraw penalty-free if needed.

Of course, you will want to know how the company calculates discounts and rate increases based on your data. Make sure that they cannot refuse a claim or cancel your policy because of the data they’ve collected, too.

Summary

Even though tracking driving behavior may sound ominous, usage-based insurance can offer fairer pricing for many drivers. Since it’s based on performance, not statistically-based assumptions, you can be sure that the insurance rate you pay is the one you earned.