Pay as you go car insurance might be better option

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On two wheels

Some companies are offering pay-as-you-go car insurance, which bases premiums on mileage and driving habits, that can save money for a lot of drivers. Photo Credit: Swifty544/Wikimedia Commons/CC-BY-SA

In the past couple years, a number of car insurance companies have been offering “pay as you go” car insurance. It’s a usage-based insurance scheme, where a driver pays depending on how much they drive and it can save money for many drivers.

Pay as you go car insurance a recent invention

Car insurance is a Catch-22. Drivers are mandated to have car insurance or face legal penalties but one hopes to never need it. People keep paying premiums, which for some people amount to the same amount as their car payments or more.

However, some people are of the mindset of saving money wherever possible, including their car insurance, beyond just switching to GEICO. Hence, the rise of pay-as-you-go car insurance, where the premium is based on how much one drives. The first program started in Texas in 2001, according to Daily Finance, but the format got a lot of press last year when it was launched in California.

Not available everywhere

Despite it seeming like it was completely new, a number of companies were already offering pay-as-you-go car insurance in multiple states by the time California got wise to the benefits. According to Edmunds, Progressive had at least 100,000 customers using theirs as of February 2011. Progressive’s pay-as-you-go program, called Snapshot, was available to customers in 27 states as of that month, spreading to five more as of April 2011, according to Daily Finance.

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Currently, eight of the 10 largest insurance companies, including AllState, Hartford Financial Services and State Farm, offer some sort of pay-as-you-drive insurance plan in various states. Customers will have to check with local insurance agents to see if it’s available to them, as not all companies offer them in all states. State Farm’s program, for instance, is only available in 12. Hartford’s is available in six.

Staying on track

All the plans work the same. A device is installed in the customer’s car, which gathers data about their driving habits. This aspect is controversial, as some felt it would lead to a “Big Brother”-like scenario, but not all tracking devices, according to Edmunds, use global positioning satellite tracking. The devices relay telemetry about speed and miles covered, with some working as a subprogram of GM’s OnStar system.

Significant savings possible

Naturally, pay-as-you-go car insurance encourages people to drive less. It also means that people that don’t drive much and don’t get a lot of tickets or into a lot of accidents aren’t subsidizing the people who do. As a result, they save money. Progressive, according to Daily Finance, estimates of savings up to 30 percent or $150 off their annual premiums using Snapshot. State Farm estimates the typical driver, at about 11,000 miles per year, would save about 12 percent. Given a typical annual premium of $1,000, that’s around $120. Granted, that doesn’t mean one can go to any Tom, Dick, Harry or Michael’s Toyota dealership and pick up a new Land Cruiser to celebrate, but it helps.

Obviously, savings will vary by customer, but the Brookings Institute estimates up to 70 percent of people who enroll will save money, and that if all insurance switched to a usage-based monthly car insurance scheme, roughly 67 percent of American households would pocket an extra $270 per month.

Sources

Daily Finance

Edmunds

Daily Finance


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