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Low cost car insurance: Pay-As-You-Drive

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author photo by Russ Heaps June 2013
  • Pay-as-you-drive car insurance can save motorists money.
  • Insurers measure more factors than simply miles driven.
  • Privacy continues to be an issue with such information-gathering schemes.

On the hunt for low cost car insurance? Pay-as-you-drive policies are the latest big thing in reducing car insurance premiums -- but are they right for you?

The government wants to get cars off the streets to ease congestion; environmentalists want to get cars off the streets to reduce carbon emissions; and car insurance companies want to get cars off the streets to reduce the number of claims they pay each year. Seems like everyone wants us to drive less. The most efficient way to remove cars from the streets is to encourage motorists to drive fewer miles.

Welcome to pay-as-you-drive car insurance. Available from several mainstream insurers in 44 states, it's worth considering for anyone looking to rein in their household budget.

At the heart of this model is the belief -- on the part of government, which must approve and regulate such policies, and insurers -- that if people know their car insurance premiums are tied directly to the actual miles they drive, they will drive less. In short, it's prodding people to change their behavior by dangling a carrot of cash savings.

For consumers -- particularly those who only drive a few thousand miles each year -- pay-as-you-drive can save an average of $150 per year, according to Progressive, the pioneer auto insurer in offering such policies, and the company with the most experience with the model.

Are you willing to drive less to save $150 a year? According to an unscientific September MSN Money-Insurance.com online poll that asked, "Would you be willing to drive less to cut your insurance rate?" up to about 60 percent of respondents would, depending on the size of the savings.

But it's not always a matter of just driving fewer miles. Here is what you need to know as you consider switching to a pay-as-you-drive plan.

Who is eligible?

Virtually any car owner or lessor residing in a state that approves and regulates pay-as-you-drive plans can opt for pay-as-you-drive.

How does it work?

Choosing pay-as-you-drive insurance means allowing a transponder, about the size of a garage door opener, to be attached to your car -- usually on the steering column through the same portal your mechanic uses for diagnostic equipment. It constantly transmits information to the insurance company about how the car is driven.

What information is collected?

The information collected and stored varies from insurer to insurer, but the bottom line is that the more information an insurer gathers, the more accurately it can predict the risk a driver poses. Among the information that can be collected are miles driven, driving speeds, sudden braking, location and time of day. Progressive calls its program Snapshot and says that while it does monitor a car's speed, it doesn't factor speed into the deduction equation. Snapshot doesn't have a GPS element to track location.

How is the collected information weighed?

Because the idea is to motivate motorists to drive less, the most important information collected is miles driven. Typically, this is measured daily. The fewer miles you drive, the larger the potential discount.

Sudden braking is also monitored. Insurers consider sudden braking evidence of following too close and/or aggressive driving. A pattern of sudden braking can reduce or eliminate the savings earned through driving fewer miles. Time of day is another key factor. Insurers view avoiding rush-hour traffic and keeping your car parked between midnight and 4 a.m. as risk-reducing behavior, contributing to a discount.

Most insurers that monitor speed and location factor these into their discount formula. Speed speaks for itself: Insurers view heavy-footed drivers as bigger risks. Where your car spends its time, whether moving or parked, measures risk in terms of traffic congestion as well as loss through theft and vandalism.

Before diving into low cost car insurance in a pay-as-you-drive program, be realistic about where, when and how you drive your car.

Is your information private?

In a digital world, privacy is an evolving concept. Just about any GPS-based system, whether on your smartphone or with a concierge service like OnStar, can track the device and transmit its/your location. Only the intentions and quality of the security of the service provider keep your information out of the hands of others.

Insurers to varying degrees vow not to sell or release the client information gathered. They put these promises in writing. However, there is always the potential for security breaches. Moreover, this privacy umbrella doesn't extend to law-enforcement agencies making a legal case for accessing your information.

Once your information is collected, it is out of your control.

What it means to you: In an economy in which every penny seems to count, saving $10 or $15 a month may well be worth the tradeoff in privacy. Only you can decide that.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Low cost car insurance: Pay-As-You-Drive - Autotrader