How a Pay-As-You-Drive Policy Can Cut the Cost of Auto Insurance

For those who are ready to cut the cost of automobile insurance this year, enrolling in a pay-as-you-drive program may be the solution to driving down rates.

Many people haven't heard about this option, but let's explore how a PAYD policy works, the major pros and cons, and how much can be saved.

PAYD auto insurance gives discounts based on driving behavior. The safer an individual appears to an insurer, the less that person will pay. 

Some PAYD programs only track mileage through self-reported odometer readings or an on-board communication system. The less one drives, the less likely he or she is to get into an accident and make an insurance claim.

So drivers who are on the road less get bigger discounts.

Other PAYD programs monitor mileage in addition to metrics such as average driving speed, how hard the driver hit the brakes, and when and where one drives. Data are typically tracked by a small device provided by the insurer that is plugged into a port under the dashboard.

Drivers who stay within safe ranges set by the insurance company qualify for lower rates. For instance, those who drive less than 12,000 miles per year, never exceed 85 miles per hour and rarely drive after 2 a.m. will pay less than a driver with high mileage and a lead foot.

These technologically advanced programs go by several different names other than PAYD such as distance-based insurance; mile-based insurance; pay-as-you-go insurance; telematics, which is a hybrid of telecommunication and informatic; and usage-based insurance.

The major benefit of PAYD insurance is that the rate is influenced more by driving behavior and less by aggregated driver statistics, past driving record and personal characteristics. That levels the playing field and can make car insurance more affordable for those who typically pay the most such as single, young males and anyone with poor credit.

With traditional auto insurance, the rates paid are largely based on personal characteristics that can't be changed such as age, credit rating, gender, marital status and years of driving experience.

Vehicle tracking devices also monitor driver safety and reduce the frequency of theft by allowing stolen vehicles to be located quickly and recovered. All these benefits allow insurers to cut costs and pass along a percentage of the savings to policyholders.

Discounts vary by insurer and state, but policyholders could save up to 40% or 50%. 

Privacy concerns are the main disadvantage of PAYD programs and tracking driving behavior. Many drivers don't like the idea of being monitored and having data potentially misused or wonder if they will overpay for insurance if they misbehave behind the wheel.

Although sharing personal information isn't for everyone, it has become the norm as GPS devices and smartphones have gone mainstream. The reality is that carrying a smartphone reveals much more about where a driver goes and what he or she does than a telematics device in the car.

Those who are willing to give up information about their driving behavior can certainly cut the cost of auto insurance.

Here are three facts to help understand whether it is worth switching from a traditional policy to a PAYD program.

1. Drivers can still speed, within reason. As previously mentioned, some PAYD programs don't monitor vehicle speed as a factor in giving a discount. But even those that do only ding drivers for driving over 80 miles per hour.

And for those who do slip up and exceed the insurance company's recommended limit, remember that the rate won't increase, but an existing safe driver discount could be lost.

2. Getting a safe driver discount may take time. Different insurance companies handle PAYD discounts differently. Some may offer a small signup incentive, such as a 10% discount and then apply the full savings at renewal time, which is usually every six months.

3. Rates don't rise for bad drivers. Insurers claim that rates won't rise for bad drivers, but they just won't qualify for a discount.

The only situation where there could be a rate increase is if an individual claims to be a low-mileage driver but then log miles over that amount annually. So be sure to estimate mileage as closely as possible.

Despite privacy concerns, the market for PAYD insurance programs is starting to heat up. Insurers like the ability to reward low-risk policyholders, and consumers love getting personalized discounts, cutting insurance costs and keeping more of their hard-earned money.

This article is commentary by an independent contributor. 

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