Your Auto Insurance Questions About "Pay-as-you-go" Answered

Q: My auto insurer now offers “pay-as-you-go” auto insurance. Is it really cheaper than regular insurance?A: Pay-as-you-go coverage is the latest trend in the auto insurance industry—essentially your insurance premium is based on how many miles you drive. Generally, this kind of coverage targets consumers who drive less than 15,000 miles a year. Generally, the less you drive, the less you’ll pay.

Some of the biggest names in the industry have rolled out their versions of pay-as-you-go coverage, including Allstate Insurance Co., GMAC Insurance, Progressive Casualty Insurance Co., and State Farm Insurance, although coverage is not available in all states.

Insurers say pay-as-you-go can save drivers hundreds of dollars, with some saving up to 50% of their current premiums. A 2008 study by the Brookings Institute found that if all motorists paid for insurance per mile, rather than in a lump sum based on a number of factors, it would save each household an average of $270 per car.

While there are certainly consumers who can benefit from this type of coverage, there’s always a catch. In order to qualify for the discount, you typically have to install a tracking device in your vehicle. (You didn’t really think they’d take your word for it, did you?) The devices monitor your driving over a period of months, and the rate you pay is based on your driving patterns.

For example, Progressive’s “Pay as You Drive” program requires drivers to install a “SnapShot” device that totes the number of miles driven.

“After 30 days, the customer can log in to their policy to see how much of an initial discount they’re earning and what changes they can make to their driving habits to save even more. At the end of the six month policy term, the customer returns the device to Progressive, and Progressive calculates the final discount. The initial discount is applied to the first six-month policy term and the final discount applies to policy terms going forward,” according to the company’s Web site.

Consumer groups warn that these devices pose a privacy risk. Although some insurers say they don’t track vehicle speed or its location, it’s certainly possible to do so. Other insurers do track such things as how fast you drive and how hard you brake—and penalize drivers in the program for it. (In fact, this type of coverage might be ideal for nervous parents who like the idea of Big Brother tracking their children’s driving habits.)

If you’re a careful driver who drives infrequently, a pay-as-you-go program may save you money. Before switching to this type of coverage, however, speak to an insurance agent or your financial adviser about group discounts that may be available by combining all of your insurance products (home, car, boat, life, etc.) under one insurer.

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