Pay-as-you-go car insurance

Why should a driver with a five-minute commute pay the same as a driver with a two-hour commute?

If you want great car insurance as a safe driver but don’t drive much, compare pay-as-you-go car insurance that sets rates based on your usage like how much or how safely you drive.

How does pay-as-you-go car insurance work?

Pay-as-you-go car insurance works by using an installed device, app or a built-in service like OnStar to track your driving, called telematics. The policy’s main characteristic is that it uses the tracked driving behavior to set rates or give discounts, and it works best if you don’t drive many miles each year.

Difference between telematics programs and pay-as-you-go insurance

Pay-as-you-go insurance and telematics go hand in hand. Pay-as-you-go insurance relies on telematics, while telematics can exist on its own.

Telematics refers to technology that’s used to track your driving habits.

Pay-as-you-go insurance is a pricing method, using your driving behavior and mileage to base your rates. Pay-as-you-go insurance uses telematics to track your driving behavior.

The term telematics is often used interchangeably with pay-as-you-go insurance or usage-based insurance, but just because you’re enrolled in a telematics program doesn’t mean you’re in a pay-as-you-go pricing model.

Terms to know with pay-as-you-go insurance

You’ll hear phrases like usage-based insurance (UBI), pay-as-you-drive or black box insurance. You also may find the terms telematics and pay-per-mile used interchangeably with pay-as-you-go policy terms because these policies have similar characteristics.

How much you pay depends

Pay-per-mile car insurance policies charge you a base rate like $30 and then a few pennies per mile, focusing on how much you drive. Many companies also offer free miles if you drive over a mileage cap, like 250 miles in a day, such as Metromile.

However, each company differs in the exact mileage that saves you money — some help you save at 10,000 miles or less per year while others require lower mileage. Also, this policy still uses traditional factors like your age and driving record, and some also factor in your tracked driving behavior.

See which pay-per-mile car insurance policies may be available to you.

Sign up for pay-as-you-go insurance in 6 steps

Getting started with pay-as-you-go car insurance follows a simple process:

1. Review the terms.
2. Sign up with the app or policy.
3. Receive your black box telematics device from the company in the mail.
4. Install it by following the instructions provided.
5. Drive as normal.
6. Review your driver scorecard to improve your driving and reduce your premiums.

Once the data has settled or becomes consistent, your driver safety score locks in, and you can send the box back to the insurance company. As such, step six is important for reducing future costs.

Is pay-as-you-go car insurance right for me?

Anyone who drives less than the average person may benefit from the pay-as-you-go or pay-per-mile system. Similarly, anyone who wants full coverage insurance but doesn’t drive enough to warrant paying full price might consider this option. Drivers who might benefit most:

• City dwellers. If you live in a metropolitan city like New York or San Francisco, you may use public transportation more often than you drive.
• High-risk drivers. Insurance companies charge higher rates for risky drivers, including drivers under 25 and drivers without perfect credit. But UBI rates depend on your actual driving, not your demographics.
• Remote workers. With a 10-foot commute to your home office, you likely don’t drive much except to run errands.
• Seasonal workers. Seasonal workers like teachers who don’t drive as much during the summer could use pay-as-you-go insurance during the off-season.
• Seniors. After you’ve retired, you could drive much less than before and may not need full coverage.
• Students. Pay-as-you-go options work well if you’re a student who leaves your car at home while away at school or who mostly stays on campus.
• Those with multiple cars. If you own a car as a backup or for pleasure riding, you could save if you don’t use it much.

Pay-as-you-go car insurance pros and cons

How does usage-based insurance track my driving?

All three tracking methods work in a similar way, such as:

• Plug-in device. You install a telematics device in your car called a black box. You may need to remove it every so often, so your insurance company can analyze the behavior tracked.
• Built-in device. Built-in devices like OnStar or SYNC can show your mileage and driving behavior to your insurance company automatically.
• Smartphone app. Instead of using a separate telematics device, you download your company’s app to collect driving data on your phone.

How can pay-as-you-go car insurance help me save?

A good driver safety score from telematics information will lower your premiums, while a bad score may increase them. However, many drivers save money using this policy because it:

Pay-as-you-go insurance not for you? Telematics may still offer discounts

If you drive more than 30 miles a day, or more than 12,000 miles a year, then pay-as-you-go insurance may not be the best saving money tactic for you. However, if you’re still a safe driver and want some discounts, then opting for just a telematics program (without the pay-as-you-go pricing model) could be for you. Many programs offer an immediate discount for just signing up.

How does a telematics device rate my driving?

Rather than looking at one specific journey, the telematics device looks at many trips combined to discover your driving risk. Not every company uses all the tracked data to determine your rate. Some areas telematics can track include:

In addition to tracking your driving, a black box also records your location, the distance driven over the year and GPS data.

Can telematics raise my rates?

Most telematics programs just offer discounts for driving safely and don’t charge you more for driving “dangerously.” However, read the fine print because telematics programs like GEICO’s DriveEasy and Progressive’s Snapshot could mean a higher rate if you don’t drive safely according to their standards.

Driving behaviors that could increase your rates include:

• Hard braking
• Driving long distances
• Driving at night
• Driving on dangerous roads
• Changing lanes or speed frequently
• Taking corners too fast
• Driving in poor weather conditions

Of course, not everyone can always avoid driving at night, driving long distances or driving in poor weather conditions. If these “poor” driving behaviors are frequently unavoidable for you, then going with the telematics programs DriveEasy or Snapshot may not be for you.

Compare pay-as-you-go car insurance

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What does the insurance company do with my data?

The app or device may automatically transmit data back to the insurance company or may require you to take it out and hand it to your insurer to download the data. The insurance company reviews this data and uses it to adjust your premiums.

Your insurance company then uses the black box information to assign you a driver safety score, which shows the kinds of risks you pose to the company. The insurer may give you a score for every trip or assign an adjustable overall score.

This wealth of information is a gold mine for car insurance brands, as it lets them calculate risk much more accurately. Telematics car insurance lets safer drivers pay lower premiums to match their personal driving habits.

Is it safe to trust a telematics device with my data?

Some privacy advocates express concerns over the data collected from telematics devices. How do companies use this personal information? If you share these concerns, you can make sure your insurance company offers full disclosure about what happens to the data collected. You’ll find that most insurance companies use measures to safeguard your personal information, rather than selling it.

Another privacy concern is the GPS tracking feature on the device. For some, this sensitive information offers more private information than drivers are comfortable giving. However, some devices let you turn off the GPS feature.

When deciding if usage-based insurance is the route for you, keep in mind that these tracking programs aren’t mandatory. You can opt in and out at any point.

Black box insurance exclusions

The same exclusions apply to black box car insurance that apply to standard car insurance policies. The insurance company may not pay out for:

• Damage caused from illegal activities
• Damage that occurred while the driver was under the influence of alcohol or drugs
• Damage caused by someone else driving your car who isn’t listed on the policy, in some cases
• Damage related to acts of war or biological, radioactive or chemical contamination
• Damage from track or road racing
• Loss because of an unattended and unlocked car in a public place
• Loss of value from depreciation or wear and tear
• Repairs from an unauthorized mechanic or damage from shoddy repairs unless authorized by the insurer
• Damage caused by pets or other domestic animals under your care or responsibility

In addition, insurance companies may refuse to pay out if you showed dishonesty in your dealings with them. Black boxes make some cases of dishonesty easier to spot with clear proof.

Bottom line

Enjoy car insurance premiums customized for your driving with pay-as-you-go car insurance. If you don’t mind transmitting your driving data to your insurance company from a black box, app or built-in device, you could save a bundle on your car insurance.

If you’re not sure whether pay-as-you-go insurance is worth it, compare other car insurance options to find the best policy for you.

Common questions about usage-based insurance

• Where is black box insurance available?

  You can get pay-as-you-go insurance in every state, but it depends on the provider.

  For example, HiRoad Assurance Company now offers an app to Rhode Island drivers. Drivers receive a safe driving rating based on their speed, braking and other factors on the road, and they’re given discounts based on that safety rating. The app displays your score and projected discounts for each trip, so you can change your driving behavior based on real-time data.

• What's considered low mileage?

  The average driver puts 10,000 miles a year on their car. If you drive less than that, you might qualify as a low-mileage driver.

• Where does the telematics device go in my car?

  The black box plugs into your car’s diagnostic port, usually located near the steering column. Older cars might not have this port, so you might wait until your next car upgrade to switch.

• Will usage-based driving really improve my driving?

  A study by the Insurance Information Institute found crash rates dropped 20% to 33% for drivers using telematics devices. Because you get feedback about your driving instantly or at the end of your drive, you’re encouraged to drive better. Your insurance rates will lower as a result.

  You can also see your strengths and weaknesses as a driver since most black box devices rate your driving based on multiple factors.

• Can I cancel pay as you go insurance anytime?

  Yes, you can cancel pay as you go or pay per mile policies anytime, although cancellation policies will vary by the insurance company. You can check for any cancellation fees before ending your policy to avoid surprises.