Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Content Writer & Entrepreneur Shuman Roy

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 6, 2022

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“Pay-as-you-go car insurance” is a relatively new type of insurance coverage borne out of the ongoing struggle to lower the cost of insurance and offer a wider variety of insurance options.

Pay-as-you-go car insurance is an insurance policy with premiums calculated based on how frequently you drive and how far you drive. Drivers who drive less will have cheaper rates than those who drive many miles.

This type of auto insurance policy is best for drivers who don’t drive too often but still need some kind of protection. Pay-as-you-go insurance is also called usage-based car insurance because the auto insurance company calculates the rates based on your driving behaviour.

Since behaviour such as hard braking or speeding can lead to higher accident rates, drivers with safe driving habits such as following the maximum speed limit and avoiding hard braking will enjoy lower premiums offered by a usage-based insurance policy.

Pay-as-you-go auto insurance is different from pay-per-mile auto insurance. Pay-per-mile car insurance is a usage-based program that calculates insurance costs based on the number of miles you drive.

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

Auto insurance companies have developed a highly technical device that is installed in your vehicle.

This device tracks your mileage and driving habits as you drive your car. It monitors the time of day, the miles driven and how the insured behaved. You are only charged for the number of miles your drive.

The less you are on the road, the lower the chance you will be involved in an auto accident, and thus file an insurance claim and cost the insurance company money.

Not only does this device track your mileage, but it tracks your location as well.

Some experts argue this is an invasion of our privacy. Of course, if you aren’t up to “no good” and only drive a limited number of miles, who cares?

The popular Progressive Snapshot is an example of such a device, though it is used to track driving and adjust premiums, not necessarily pay-as-you-go coverage.

Pay-as-you-go auto insurance covers only the minimum requirements (liability coverage).

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Will pay-as-you-go auto insurance benefit you?

The answer depends on your personal driving habits. If you only commute small distances or rarely use your car, the answer may well be “yes.” The less you drive, the more you save.

This may also benefit you if you have a second vehicle that isn’t a regular driver.

If it’s parked most of the time while you drive another vehicle back and forth to work, this may be the best option to reduce your overall insurance premium.

It might not make sense for you to pay the premium required to insure a car for a full year. Many insurers have a “minimum-mileage” rating requirement.

For example, your auto insurance provider may calculate your auto insurance rate using 8,500 miles as the minimum amount of miles you travel per year.

It doesn’t matter whether you drive one mile or 8,500 miles, the rate is the same.

What happens when pay-as-you-go car insurance backfires?

The money you save on your insurance premium may not be worth it if you have to cover all, or some, of the costs for obtaining and installing your pay-as-you-go tracking device.

Make sure to calculate any costs associated with installing and/or servicing your device when determining if you’re actually going to save money.

Just like any other new technology, you can expect to pay a premium for being the first to have the newest toys.

If you went form Beta-Max to VHS to DVD to BluRay faster than anyone else you know, you are intimately familiar with these costs.

Another situation when pay-as-you-go car insurance may backfire on you is if you go over the maximum mileage allotted for the program.

Similar to leasing a car, once you surpass the agreed upon maximum mileage, you may be subject to a penalty, or worse, a “per mile” fee for every mile over the limit.

Make sure you carefully read and understand the contract you sign to ensure you limit your exposure to these potentially hidden or deceptive fees.

Currently, only Progressive and GMAC offer pay-as-you-go car insurance, and even then, they don’t offer it to everyone or in all areas.

Get insurance quotes online or contact an independent auto insurance agent to make sure you are getting the best auto insurance coverage at the lowest possible rate.

Which companies offer pay-as-you-go insurance discounts?

Pay-as-you-go auto insurance coverage may not include how much you spend per month, but rather how much you save per year. Some pay-as-you-go auto insurance programs are created to save you money based on how you drive instead of calculating a monthly base rate based on how much you drive.

There are some popular usage-based insurance programs offered by major insurance companies such as: Progressive SnapShot, Allstate Drivewise, State Farm Drive Safe & Save, Nationwide SmartRide or Liberty Mutual Right Track.

See also: Short term car insurance.