Alternatives to Standard Insurance: How Does Pay Per Mile Insurance Work?

Fran Majidi
April 24, 2019

Those of us looking for ways to save money often focus on are bills and how we can reduce them. We all want cheap car insurance and are frustrated by high rates and overwhelming premiums. Some of us simply don’t drive very often and resent having to pay so much for insurance when the car sits in the garage the majority of the time. There are also those of us who drive very carefully and want our auto insurance to be discounted for it. Are there options for us?

Pay-per-mile car insurance and telematics are popular options for people who drive infrequently. Pay-per-mile insurance gives you the ability to pay for the miles you put on your car, not more, not less. The way it works is that you hook up a device to your car that tracks the number of miles you drive per month. This amount is used to determine a per-mile rate. The per-mile rate is different from the base rate, which is derived in the traditional way and is based on the standard factors: age, vehicle, driving history, etc.

The biggest difference between pay-per-mile insurance and traditional insurance is that with the traditional form, your rate is not based heavily on how much you drive. With pay-per-mile insurance, your mileage is the most important factor used to determine your rate.

Unfortunately, this cost-effective way of insuring your car is not offered by many insurance companies. Some of the bigger companies use telematics tracking instead of pay-per-mile tracking.

What Is Telematics? Pay-Per-Mile vs Telematics

Telematics is similar to pay-per-mile insurance but slightly different. Telematics relies heavily on driving behavior to determine your car insurance rate. On the contrary, pay-per-mile focuses on mileage. Whereas the pay-per-mile gadget tracks miles driven, the telematics tracker focuses on speeding, sharp turns and braking, late-night driving and more. Some popular options for telematics insurance include Progressive Snapshot, Allstate Drivewise, State Farm Drive Safe & Save and Nationwide SmartRide. On average consumers save anywhere between 5% and 50% on insurance.

Be sure you’re not overestimating your driving habits. It’s not unheard of for people to experience rate hikes when transitioning to telematics because they drive carelessly by speeding or braking frequently.

Here’s how telematics work: You get a device from the insurer and install the device in the data port of your car. The gadget tracks driving distances only when it’s pay-per-mile and it tracks miles and habits/behaviors if it’s telematics. The information is transmitted to the insurance carrier, who then sets a premium based on the findings.

Is Pay Per Mile Insurance Worth It?

Esurance and MetroMile are the only companies that offer pay-per-mile insurance, and they offer it in certain areas only. Metromile claims that it saves drivers $500 a year and only sells pay-per-mile insurance. Esurance offers standard car insurance as well as pay-per-mile insurance. Often, insurance models that use telematics devices are also referred to as pay-per-mile insurance as well.

When you elect a pay-per-mile car insurance policy, you’re not compromising your level of protection. You are simply mitigating risk by driving less and proving it. So, if you have comprehensive and collision coverage on your car, the details of your account stay the same.

As for the money you save, let’s give you an example of how the rate per mile s calculated. If you drive 100 miles per month at a rate of 5 cents per mile, you will be charged $5 for your month’s rate per mile. You’ll pay those $5 along with the standard base rate which is derived from the usual factors like age, where you live, etc.

Who Benefits from Pay-Per-Mile Insurance?

Not everyone benefits from pay-per-mile. If you put a lot of miles on your car, this option is not for you. The less you drive, the better off you are with pay-per-mile insurance. Generally speaking, drivers who put less than 12,000 miles a year on their car should consider this. If you put more than 12,000 miles on your car each year, it’ll be much more expensive than regular auto insurance. But if you drive about 5000-7000 miles a year, you can get a very low rate.

Is Pay-Per-Mile Insurance Better Than a Low-Mileage Discount?

Most companies offer a low-mileage discount for people who drive very infrequently. Each insurance company has their own mileage requirement. Some go as high as 7,000 a year while others will discount you at 5,000 miles or lower. You may or may not need to verify your odometer reading, either by filling out a form or taking a photograph. To find out which option would save you more money each month, have an estimate of how many miles you drive a year handy, then fill out the information here and you’ll be connected with the right car insurance agent who can assist you further.

Surety Bonds: Another Alternative to Standard Auto Insurance

While it’s true that you need auto insurance to drive legally, most people don’t understand that there are a couple of alternatives too. Not only is the pay-per-mile model one alternative to traditional insurance, but so is buying surety bonds. Basically, the whole premise behind the insurance requirement is to provide proof of one’s ability and responsibility to pay for an accident if one were to occur. While surety bonds are cheaper upfront, they cost much more than car insurance in the long-run.

If you’re asking “What’s a surety bond?” you’re in the majority. Most people are unaware that this alternative exists and most have never even heard of a surety bond, a legally binding contract among three parties: the person requesting the bond, the entity requiring the bond and the surety, which is the company guaranteeing the transaction. Basically, the contract states that you are responsible to pay all financial obligations to a third party or else the surety agency will pay up to the amount of the bond. You then repay the bond over time if a claim is made against it.

Basically, a surety bond places responsibility for an accident or liability on you. With car insurance, you pay a premium on a monthly or yearly basis in order to keep your coverage. Surety bonds guarantee that the person at fault is financially responsible for damages. It then pays in advance before repayment begins. Not all states accept a surety bond as an alternative to car insurance.

You can also self-insure but this is only an option in certain states and only if you’re self-insuring 25 cars or more, something a majority of us do not have.

Compare Car Insurance Quotes

The best thing you can do to ensure that you’re saving money is to shop insurance quotes. Ideally, you want to work with one company, like SmartFinancial, to generate lots of rates based on the information you give them only once. After you choose a rate, you’ll be placed with an insurance agent with whom you can discuss pay-per-mile rates, surety bonds and/or telematics rates in greater detail to see which option will bring you the most savings. Always work with a trusted and knowledgeable online source when finding the right agent. We’re here to help you compare quotes here.

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