Every driver is familiar with the traditional method of purchasing car insurance. It’s the flat-rate policy that charges you an annual premium based on your previous driving history and risk profile and lets you drive as much as you want in that 12-month period.
But another option is available from several providers today: pay as you go insurance. What is it, and is pay as you go insurance worth a look? Here’s what you should know.
What Is Pay As You Go Insurance?
If you’re a homeowner, most utilities charge you based on consumption rates. You only pay for the amount of electricity, natural gas, and water that you use. Pay as you go insurance is similarly structured, but for your car.
With pay as you go insurance, your premiums are based on your driving. Naturally, the more miles you rack up on the odometer, the higher the likelihood you’ll get into an accident, whether it’s your fault or not. If you drive more, you pay more. If you drive less, you pay less.
The fee structure starts with a base insurance rate, then adds on the cost per mile. How is your mileage tracked? A small device is installed in your car that keeps track of your miles driven. Your payment will vary from month to month simply because you’ll drive different distances in each time period.
Weighing the Pros and Cons of Pay As You Go Insurance
Wondering if pay as you go insurance is right for you? That’s an individual decision you have to make, although there are positives and negatives to this type of policy.
- The same coverage as a traditional auto insurance policy.
- Lower insurance premiums for motorists who drive fewer miles.
- Saves money if you spend a lot of time in the car in congested traffic but don’t go far.
- Perfect for drivers who own a second vehicle that’s rarely driven, or for people who work from home.
- You can save money by driving less.
- Your premium changes month to month, making your banking a little less straightforward.
- A change in driving habits or a job change that requires a long commute could increase your insurance costs.
- It doesn’t work well for households with multiple drivers.
Is it Worth It?
A program like Nationwide’s SmartMiles usage-based insurance could mean significant savings for some. For others, it simply doesn’t make sense. Here are a couple of scenarios where pay as you go insurance could benefit.
- A recent graduate under the age of 25 owns a car but shares carpooling duties with three co-workers. Being considered a high-risk policyholder, a normal policy would be quite costly, especially for days that the car doesn’t move at all. Usage-based insurance would save this driver because they aren’t paying for the days the car is parked, only for when it’s used.
- A mid-thirties woman with a clean driving record for the past five years commutes 30 miles round-trip into the city five days a week, plus she leads an active lifestyle in the evenings. With usage-based insurance, her premiums are higher than a traditional rate, so it doesn’t make sense for her.
It benefits you most to embrace pay as you go insurance if you’re a driver in a high-risk category, someone who accumulates fewer miles than average, or you’re insuring a seldom-used extra vehicle.