July 8, 2019

Pay As You Go Insurance

Read more about Car Insurance

Pay-as-you-go car insurance is gaining speed among drivers. But is it the right choice for you? Check out the pros and cons before deciding.

Thanks to technology, pay-as-you-go technology has become a great option for drivers who:

  • Have a short commute

  • Carpool

  • Work from home

  • Don't drive often or have low annual mileage

  • Use public transportation to commute and drive their vehicles only on weekends.

  • Have a multiple vehicle household where there are lesser-used vehicles

  • Are new, young, or inexperienced drivers looking to lower their premiums

  • Have antique cars that are not rarely driven.

Read on to see if this auto insurance option makes sense for you.

How Does Pay-as-You-Go Auto Insurance Work?

This type of auto insurance policy is based on actual vehicle usage. Your policy premium, or the amount you pay, is determined by how many miles you drive.

You might also see this insurance called: pay-per-mile, pay-as-you drive, mile-based car, low mileage discount, or usage-based auto insurance.

With traditional auto insurance, insurers base their rates on certain assumptions:

  • Drivers drive an average of 12,000 miles per year.

  • Most people drive during peak traffic hours, such as morning and evening rush hours.

  • Most accidents happen during peak traffic hours.

Even if these assumptions don't match your driving behavior, you still pay for traditional car insurance as if they do. But with pay-as-you-go insurance, your rate changes month to month based on:

  • The time of day when you drive

  • How often you drive

  • Your driving behavior. Some types of policies, good driving behavior is rewarded, such as driving within the speed limit, not braking suddenly, or not taking turns too fast.

Some insurance companies use a pay-as-you-go structure that includes a low base rate plus a per mile price. Premiums are paid on a monthly basis, rather than every six months or once a year.

Auto insurance companies assuming less time on the road lowers the likelihood of an accident. The less your insurer pays out in accident claims, the less you pay for auto insurance.

How do they know when you're driving your vehicle?

Auto insurance companies can choose from three different ways to monitor your driving:

Certifying the odometer reading yearly
You provide your insurance company with a certified copy of your odometer reading each year. This qualifies you for the lower pleasure rate versus the higher commuter rate.

Installing a tracking device
This small box automatically collects data from the vehicle, which is then transmitted to the insurer. Data captured includes:

  • Time of day
  • Speed
  • Distance or time traveled
  • Driving actions

Using a built-in telematics system
These systems (OnStarĀ® is one example) automatically report mileage. A GPS gathers the data and transmits it via radio frequency or cell phone.

Advantages of Pay-as-You-Go Insurance

Cost Savings
Your auto insurance premium is significantly less than that of traditional car insurance. This is particularly beneficial for new, young, or inexperienced drivers, since this group pays the highest premium due to the risk they pose.

Reduced Pollution
Driving less means cutting down on the harm done to the environment when you get behind the wheel.

Disadvantages of Pay-as-You-Go Insurance

Invasion of Privacy
Many people feel anxious knowing that a tracking device is following them. This type of insurance has a "Big Brother is watching you" feel.

Some auto insurance companies require you to buy the tracking device or pay for its installation. Others charge a usage or service fee.

Maximum Mileage Limit
The insurance company sets a limit to how much you can drive. If you go over this limit, you may be charged a penalty fee or pay a fee for every mile over the limit. This may mean paying more than you would for traditional auto insurance.

Changing Premiums
Some policies change the price from month to month depending on how many miles you drive. With this fluctuation, it might be hard sticking to your monthly insurance budget.

Ask your auto insurance agent what type of monitoring method is used BEFORE securing coverage. You can also inquire about any device costs, mileage limits, and other fees.

How Much Does Pay-as-You-Go Insurance Cost?

People with mile-based auto insurance pay 25% to 50% less each year than those whose miles aren't tracked. Those who save the most usually drive under 2,500 miles a year and often drive during off-peak times.

With tracking by a telematics system, annual premium savings range from $101 to $432, depending on the miles you drive each year.

But how much you pay also depends on a number of factors, including:

  • Age
  • Gender
  • Zip Code
  • Year, Make, Model of Car
  • Yearly Miles
  • Number of Previous Claims
  • Driving History
  • Credit Score
  • Driving Record (tickets)

With a usage-based policy, you still pay for the basic coverage an auto insurance policy provides. But proving how much (or how little) you drive reduces your rate. Less usage results in a lower annual premium.

Pay-As-You-Go Vs. Traditional Auto Insurance
Sue currently pays $1,325 a year for a traditional auto insurance policy. Based on driving just 2,500 miles for the year, Sue's annual premium with a pay-as-you-go would be $675.00, a savings of $650.

If you drive your vehicle more than 10,000 miles a year, then usage-based auto insurance probably isn't the best option for you.

But if your mileage fluctuates, it's worth doing a little math to see if you can save with mile-based insurance.

You Should Know
Pay-as-you-go rates also vary by the time of day during which you drive.

Per mile rates are higher when driving during peak times and at night. For example, if you drive during off-peak times, your rate will be lower than if you drive during rush hour traffic.

Try the following steps:

  1. Track your mileage for a month. Use a month that reflects your typical driving behavior.

  2. Multiply your mileage number by 12. For example, you drove 650 miles in May, so you'll probably drive 7,800 miles for the year.

  3. Multiply your expected annual mileage by four cents, which is about how much pay-as-you-go insurance companies charge per mile: 7,800 x 0.04 = $312.

  4. Add in the base rate the insurance company charges for the coverage it provides. Let's estimate $360 a year, which is a typical average amount.

  5. Add your base rate and mileage rate to get your total insurance cost: $312 + $360 = $672.00

  6. Compare this premium amount to what you currently pay for insurance. If it's less, then pay-as-you-go auto insurance is probably right for you.

Shop around for the best deal.
The structure of pay-as-you-go car insurance differs among insurance companies. Compare the coverage and price structure to find the one that best fits your driving habits.

Which Insurance Companies Offer Pay-as-You-Go Car Insurance?

Two types of auto insurance companies offer pay-as-you-go auto insurance:

Big, well-known auto insurers
These companies usually offer the option in the form of a discount or by enrolling in their usage-based program. Besides mileage, the programs usually track driving behavior. Maximum discounts range from 25% to 50%.

Usage-based companies
These typically offer it by charging a base rate for the insurance, plus a per mile rate. These companies track mileage only, not driving behavior.

Even if an insurance company offers mile-based auto insurance policies, it might not be available in your state. You can find out by getting a quote online or through an agent.

You Should Know
An auto insurance policy provides coverage for:
  • Collision
  • Bodily injury
  • Property damage
  • Medical payments
  • Uninsured and underinsured protection
  • Damage to your vehicle by something other than collision

Bottom Line

If you drive under 10,000 miles a year, you could save considerably on your auto insurance by enrolling in a pay-as-you-go insurance program.

Learn how rates are calculated, whether there are any fees for the equipment, and if there is a mileage limit and any penalties for going over it.

You'll have to provide your auto insurance company with information about when you're driving and the mileage of the trip. In return, you could save up to 50% on your premium.

More from CreditDonkey:


How Does Car Insurance Work


What Should I Be Paying for Car Insurance


Why is My Car Insurance So High

More Articles in Money Tips

Car Insurance

How Long Does it Take to Get Car Insurance

Car insurance companies promise quotes in as little as 15 minutes. But how long does it really take? Read on for the answer, plus the different ways to get a quote.

Leave a comment about Pay As You Go Insurance?

Name
Email (won't be published)


July
22
2019

Is Personal Capital Safe

One-stop finance apps like Personal Capital are super convenient. But just how safe is it to link all your financial accounts? Learn how Personal Capital protects your data below.
More Articles in Money Tips








About CreditDonkey®
CreditDonkey is a credit card comparison website. We publish data-driven analysis to help you save money & make savvy decisions.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed on this page are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

†Advertiser Disclosure: Many of the card offers that appear on this site are from companies from which CreditDonkey receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). CreditDonkey does not include all companies or all offers that may be available in the marketplace.

*See the card issuer's online application for details about terms and conditions. Reasonable efforts are made to maintain accurate information. However, all information is presented without warranty. When you click on the "Apply Now" button you can review the terms and conditions on the card issuer's website.

CreditDonkey does not know your individual circumstances and provides information for general educational purposes only. CreditDonkey is not a substitute for, and should not be used as, professional legal, credit or financial advice. You should consult your own professional advisors for such advice.