All About Pay-Per-Mile Auto Insurance

According to state law, we are required to hold automobile insurance as licensed drivers in the United States. With gas prices higher than they have ever been before, many people are looking towards other means of transportation to cut down on their costs, such as taking a bus, train, riding your bike, or even walking. However, many people don’t want to give up the convenience of having a car.

If you do not drive that much and mention this to insurance companies when you are getting an auto insurance quote, you may be able to save a little bit of money since you aren’t on the road as much as other customers, but you honestly won’t save THAT much. Paying for a full coverage auto insurance policy doesn’t make sense for these people that don’t drive nearly as much as they once did. But since it is required by law, cutting out car insurance entirely from your life’s expenses is not an option.

Pay-Per-Mile Auto Insurance

Introducing Pay-Per-Mile Auto Insurance

With the prices of gas going up all over the world, motorists and the auto industry are looking for new ways to come up with cheaper ways to make use of their automobiles and travel in general. They resort to alternative transportation such as carpooling and using public transportation, as well as using such transportation as bicycles, while industries are looking to design their cars to run on less gas or, better yet, cheaper alternative fuel. These are all endeavors that are geared towards fewer car expenses, even if only in an incidental way.

However, these efforts do not affect the expenses for auto insurance, which is one of the significant expense considerations of many motorists today. Because they know that keeping themselves protected in case of car-related accidents, they have no choice except to budget a method of being able to afford auto insurance. But with all the cost-cutting in terms of auto expenses, auto insurance remains a volatile price that still burdens its policyholders regardless of the other economic aspects related to cars and driving.

This is where many insurance companies come in with the innovative concept of Pay-Per-Mile or Usage-Based Car Insurance. By making use of telematics technology, this new kind of auto insurance policy helps policyholders and car-owners with their problems on expenses by introducing an option that lets them pay for their insurance rates based on how much they use their car.

This means, similar to pleasure use insurance, that people who drive less, pay less for their protection, for the straightforward reason that car owners who drive less are involved in fewer car-related accidents. That way, people who drive less save not only on fuel but insurance as well.

This also benefits the insurance companies because pay-per-mile car insurance would ensure that those who drive less will not be forced to “maximize” their policies by using their car more, in turn causing more accidents, which will mean costs for the company. Auto insurance is a business, and maintaining profits while reducing expenditures is a smart business plan.

The pay-per-mile car insurance also promotes a lesser rate of car accidents because those who want cheaper car insurance rates will want to drive less to save money. Fewer cars on the road also means less pollution related to motor vehicles, making the policy environmentally friendly.

With all these reasons, pay-per-mile car insurance can only promise good things, not just for policyholders and the insurance companies who write them, but for society as well.

How Are Pay-Per-Mile Rates Determined?

Many people are curious as to how insurance rates are determined. Your best friend drives much more than you do, but you guys both pay the same amount for auto insurance.  This doesn’t seem quite fair, does it? This led the auto insurance companies to come up with a new way to offer coverage for those that want to keep their cars handy for special occasions.

What they came up with was a pay-per-mile or pay-as-you-drive plan that mostly charges you only for how much you drive. This form of pay by the mile auto insurance is definitely in its infancy but is already showing great promise. Some people are already saving 25%-40% on their auto insurance premiums. This is perfect for those that care about the environment. Eco-friendly drivers can now drive less, and save even more money than they already are by cutting down on gas consumption. Share this article with your friends – this added incentive may be able to convince them to cut down on how much they drive.

However, if you have no other choice but to commute to work or school via car, these pay-per-mile plans probably aren’t for you. Unless you are keeping your driving to a minimum, often times, you will end up paying more. You need to weigh the pros and cons of getting this type of insurance coverage. After all, you don’t want the insurance company getting the better end of the bargain.  The rule of thumb is that if you drive less than 500 miles per month, you should definitely consider pay-per-mile insurance or even one-day auto insurance.  If you drive more than 1000 miles per month, you should stick with a longer period policy.  Anything between that is up to you, get in touch with an insurance company to see if you qualify for this type of plan.

Is Pay-Per-Mile A Good Thing?

Pay-Per-Mile auto insurance is already available in many states, including Texas, Oregon, Washington, and some parts of California. For example, since 2008, if you operate a motor vehicle in Texas, you have the option to pay for your auto insurance based on the actual number of miles you drive rather than a flat 12,000 or 40,000 miles a year.

According to Chris Gay, former CEO of the Dallas-based auto insurer MileMeter (now defunct), this relatively new and innovative insurance model will do more to encourage consumers to drive less as well.

It’s Not a New Concept

Surprisingly, this idea has actually been around for over a quarter-century. Back in the mid-1980s, the National Organization for Women filed a class-action lawsuit against the auto insurance industry, claiming discrimination; according to the complaint, auto insurers were charging more for policies covering women drivers, even though statically, women have fewer accidents.

As it turns out, the reason is not that women are naturally safer behind the wheel than their male counterparts (although there is actuarial evidence for this – see my recent post). It turns out that women drive less.

Of course, this confirms what insurers have long known: the more miles you drive, the higher your chances of being involved in a collision.

A Win-Win Situation

According to Gay, MileMeter can write an auto policy for as little as $60 a year for someone who drives their car 2,000 miles a year – and still turn a nice profit for the company. Since the company started writing policies two years ago, the business model was updated to allow policyholders to roll over unused mileage and purchase additional coverage just for the miles they drive as they need them.

Of course, there is always the issue of fraud. Just like people who understate the number of miles they drive every year, one wonders what prevents MileMeter’s customers from simply misreporting their own mileage. The company has a simple solution for this; customers are required to send in photographs of their odometer settings from time to time.

Mileage Monitoring is a “Green” Idea

Gay has also stated that such an insurance model would encourage people to drive less, saving on resources and resulting in cleaner air. Two recent studies appear to confirm this. One of them, commissioned by the Brookings Institute, suggests that adoption of this insurance model across the country could reduce driving by up to 8% – more than a $1-a-gallon gasoline tax, which would go a long way toward reducing U.S. dependence on foreign oil supplies.

It’s an excellent example of how a free-enterprise solution can be useful in solving some of the social and environmental problems that we are facing today.

So, is pay-per-mile, usage-based auto insurance for you? There is only one way to find out, and that is by getting a car insurance quote. There you will be able to compare the rates of pay-per-mile and standard policies to see if they will save you money in the long run. Keep in mind; not all states have adopted pay-as-you-drive auto insurance just yet. As these programs grow in popularity, more auto insurance companies are likely to adapt them to other states.


  Comments: 2

  1. Don’t do it. Insurance companies are not your friends. Regardless of what they say, the information will eventually be used to penalize you with a higher premium, drop you, or deny coverage if you are breaking any of their rules when you have a wreck.

    No matter how safe a driver you think you are, you do not want the insurance company riding in the back seat looking over your shoulder. Insurance companies do not make a living by finding ways to help you, but by taking your premium and devising excuses for not paying – and they have decades of experience at how to do that.

    Now that they can observe you second by second they have the ultimate mechanism for worming out of giving you what you are promised when you pay a premium.

  2. the other real constraint in this type of insurance pricing is the devices themselves. We tried the Progressive monitors for 4 months. The first 2 monitors we had did not reliably connect to the internet to share data, and one of our cars, a 10 year old Subaru, did not reliably connect to the device at all. It took us months to get what Progressive considered a reliable data set to evaluate.

    Once we got a data set, we were distressed to learn that our driving did not qualify for any discounts, despite the fact that one car was driven less than 30 miles a week, and the commute on the other vehicle was 6 miles round trip.

    The problem was the condition of the roads we drive on! Because of the way the devices work (reading acceleration, deceleration or smooth driving), hitting a pothole registers as a hard brake (forward motion= zero as your tire falls into the hole). So our “records” looked like one hard brake after another. And even when we DID hard brake, our view was, “which would you rather have? A hard break, or us hit the pedestrian who runs out in front of our car to chase her dog? Or the walker who crosses against the light while reading her mobile? or the jerk who runs the stop sign at the end of the block?”

    So effectively, the device as Progressive uses it has NO value for drivers with short commutes in congested urban areas, areas with poor connectivity, or drivers with older cars where the data connections are not reliable.

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