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. However, each pay-as-you-go policy differs slightly—some offer savings the day you sign up, while others wait up to six months to lower rates.
Compare pay-as-you-go car insurance
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. 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.
It’s also known as usage-based insurance, 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.
However, you’ll find that different usage-based policies set rates either based on mileage or how safely you drive.
Pay-per-mile car insurance
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.
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.
Use a plug-in device for tracking and view your usage online.
33 states and the District of Columbia
Telematics insurance uses a device or your smartphone to track your driving habits, and it focuses on setting rates based on how safely you drive. Behaviors tracked include your braking, acceleration, cornering, the times of day you drive or your phone usage.
Telematics policies also factor in traditional factors like age and driving record as well as your mileage — but these factors aren’t the focus.
Many major car insurers offer telematics programs to set a personalized low-mileage discount, and you opt in to the program after buying your regular car insurance policy.
After the driving period, you’ll see your final rate at your policy renewal.
Sign up for pay-as-you-go insurance in 6 steps
Getting started with pay-as-you-go car insurance follows a simple process:
Review the terms.
Sign up with the app or policy.
Receive your black box telematics device from the company in the mail.
Install it by following the instructions provided.
Drive as normal.
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 usage-based insurance 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.
Pros and cons of pay-as-you-go car insurance
Only pay for the miles you drive
Lower premiums for good drivers
GPS assists recovery if your vehicle is stolen
Provides thorough information and evidence in the event of a dispute
Improves driving safety
Ideal for people who drive less or safer than average
Requires more policy management than standard policies
Requires you to pay an additional fee to rent the black box
Monthly premiums can change
You need to consistently drive safely to get the best value.
You may have concerns about data collection and privacy issues.
Ask an expert: How does telematics help me save on insurance?
One type of lesser known insurance discount is new to most people: allowing the insurance company to put some type of data recorder in your vehicle to monitor your driving habits. If you have safe driving habits or don’t drive all that often then the insurance company will reward you with lower rates.
Virtually every large carrier offers some form of potential telematics discount: GEICO, Allstate, Progressive, Esurance, Liberty Mutual, State Farm, and many others. Additionally, some specialty insurance carriers who offer “pay-by-the-mile” insurance like Metromile use telematics to calculate miles driven and determine rates.
So should you place a device in your car to record and analyze your driving? Privacy advocates are leery of yet one more device tracking us, but you may just determine that savings of 5% or more is well worth what is essentially a “set it and forget it” car insurance discount opportunity. Now just make sure to drive safely, but you already do that regardless, right?
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 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 the black box tracks:
Where you drive
How often you drive
Time spent on the road
In addition to tracking your driving, a black box also records your location, the distance driven over the year and GPS data.
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:
Replaces no-claims discounts. It can take up to six years to achieve a high no-claims bonus. But if you’re a good driver, black box car insurance can help you achieve the equivalent in one year.
Reduces risk category. If you fall in a high-risk category like a new or under-25 driver, the black box can prove you’re not a high risk based on your performance.
Penalizes less after a claim. You can make claims without worrying about a large premium hike since you won’t have a no-claims bonus to worry about. Your premiums may increase after making claims, but your driver score can stay the same.
Offers company-independent scoring. If you change insurance companies, some recognize a good driver safety score and offer reduced premiums or higher no-claims bonuses.
Works for multiple drivers. The black box works for everyone driving that car. If you name several high-risk drivers on the policy, you could get lower premiums compared to traditional insurance if all drivers prove their safe driving with black box data.
Improves driving safety. Drivers can take immediate action to improve once they see their driving habits. Compared to driving with standard insurance, young black box drivers are 20% less likely to suffer a car crash or severe accident.
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.
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.
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.
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.
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.
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.
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.
Andrew Munro is the cryptocurrency editor at Finder. He was initially writing about insurance, when he accidentally fell in love with digital currency and distributed ledger technology (aka “the blockchain”). Andrew has a Bachelor of Arts from the University of New South Wales, and has written guides about everything from industrial pigments to cosmetic surgery.
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