Pay As You Drive Auto Insurance: How It Works


If you have cable or satellite TV, you’ve probably lamented the fact that you are shelling out money each month for dozens (or even hundreds) of channels that you never watch. Wouldn’t it be great if you could just pay for the channels you actually want, instead of being “grouped” into a certain category by your television provider?

That’s not likely to happen soon. But there is a change taking place in the way auto insurance is being offered to drivers. More and more Americans are turning their backs on the “pigeonholing method” of auto insurance pricing, and are instead opting for policies that are specifically tailored to the way they drive.

The concept is known as pay-as-you-drive insurance. Simply put, policyholders are charged based on their individual driving habits and practices, as opposed to those associated with people in their demographic classification. Advanced technology has made this type of customized auto insurance possible … and it’s also saving many drivers a lot of money.

Insurance companies structure their pay-as-you-drive plans differently, but the basic idea is the same: to implant some type of device on a consumer’s vehicle which records his or her driving behaviors. Some of the data that these devices can measure include:

  • number of miles driven
  • time of day the vehicle is driven
  • speed
  • smoothness of stops and starts
  • number of collisions

For many drivers, pay-as-you-drive insurance can result in substantial cost savings on their premiums – anywhere from 8% to 30% off comparable standard auto insurance policies. The drivers that reap these savings are ones whose driving patterns differ significantly from those of their comparably categorized peers, such as:

  • a person who works from home
  • an individual who takes public transportation to work
  • a worker who lives and commutes primarily in an urban environment
  • a stay-at-home mother or father who only drives the vehicle to run errands
  • a retiree who rarely drives at all

For instance, a 24-year old man typically pays more for auto insurance than his older peers in the workforce. But if he works from home or only has a four-mile commute to work, he might benefit from pay-as-you-drive auto insurance because his annual mileage (and thus his rate) would be considerably less than that of an “average” driver in his age group. Plus, if he is a cautious driver who doesn’t speed and avoids jackrabbit starts and sudden stops, a pay-as-you-drive device might note that behavior – and he may qualify for a “safe driver” discount from his auto insurer.

However, pay-as-you-drive insurance isn’t always a good idea. People who purchase this type of policy with the hopes of saving money might end up paying more if they end up driving more than they think (for things like unexpected work travel, busing kids to school and activities, etc.). Plus, if more than one person drives a vehicle (like, say, a teenage child in the household), the data from the pay-as-you-drive device will reflect that additional mileage driven (as well as the riskier driving practices which may come with it), resulting in higher policy premiums.

Pay-as-you-drive auto insurance is not offered by every company, nor is it currently available in every state. But as consumers continue to demand personalized services, more auto insurers are adding this option to their product offerings in an effort to entice new customers. So while you may still be stuck with superfluous TV channels, you can now opt for an auto insurance policy that lets you choose.

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