What Is Pay-As-You-Go Insurance?

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Driving with a mobile app (Photo: @doondevil via Twenty20)
Chances are you’ve never heard of pay-as-you-go insurance. Also known as usage-based insurance, it’s automobile insurance in which premiums are calculated by how much you drive and your driving behaviors. Your first thought might be this is a great way to save money on insurance. However, there are things that should be explained about pay-as-you-go insurance before you should consider switching your current policy.

1. You will be tracked

Insurance companies that offer pay-as-you-go insurance require you to use a plug-in device for your car or a mobile app to monitor your usage and driving behavior.
The plug-in device plugs into your on-board diagnostics port. It monitors and logs your driving habits, transferring the data to your insurance company. If you’re required to use a mobile app, you will download it onto your smartphone where it will work as a GPS tracker. It will record how often you drive, time of day you travel, how far and if you call or text while driving. The app will only activate when you reach a certain speed, indicating you are in a vehicle.

2. You’d better be a safe driver

Much of your premium will depend on your driving habits and history. Insurance companies also take into account how often you drive, your age, type of car you drive, where you live, gender, and marital status. They use all this information to determine if you’re eligible for usage-based insurance and how much your premium will be. There are other insurance savings you may qualify for if you are a safe driver.

3. Younger and older drivers may benefit

Car insurance is often more expensive for young drivers under 25 years of age and older drivers over 65. These age groups are considered high-risk. Younger drivers due to lack of experience and older drivers due to declining eyesight and reflexes. However, if you fit into one of these categories, are a safe driver and do not drive very often, pay-as-you-go insurance may be the perfect option for you.

4. Your premiums may fluctuate

Before your insurance company approves your pay-as-you-go coverage, there will be a period beforehand in which they monitor and rate your driving habits. The data is then analyzed to determine your premium. Depending on the insurance company, your premium may change as frequently as monthly. For some agencies, your rates may only fluctuate twice a year or as little as annually.

5. Rates may be calculated at per mile basis.

Some insurance companies configure pay-as-you-go insurance premiums on a per mile rate. The less you drive, the less you pay. The average person drives 10,000 miles annually. If you drive less than that, this type of insurance may be a good option. Of course, you still must maintain good driving habits or the rate per mile can go up considerably and you may not qualify for this type of insurance. If your driving behavior is categorized as risky or unsafe, it may end up costing more than traditional auto insurance.
Pay-as-you-go insurance is a fairly new concept. With today’s technology, it is easy for insurance companies to get an accurate look at your driving behavior. Combining this data with the amount of driving you do allows companies to determine your insurance premium based on your usage. While this saves money for some individuals, it’s important to consider all the aspects involved in pay-as-you-go insurance before signing up for this type of coverage.