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How does pay-per-mile auto insurance work?

If you’re looking for a new way to potentially save money on your car insurance, you might be interested in pay-per-mile coverage. Pay-per-mile car insurance can be one of the least expensive options available. But before you make a purchase, let’s look at what it is and how it works.
Jul 28th 2021
4 min read
Learn how pay per mile auto insurance works

What is pay-per-mile insurance?

Pay-per-mile insurance rates are based on the actual number of miles you drive, as opposed to traditional car insurance, where the cost is typically a flat rate based on a variety of factors, which often include your general driving habits (whether you drive to work every day, etc.).

Imagine that you own two identical cars. One of them you drive daily while the other you rarely use. If you had the standard type of car insurance, you might pay the same rate for both cars. However, with pay-per-mile insurance, your rate for the car you rarely drive could be much lower.

Of course, you don’t have to own multiple cars to save money with pay-per-mile insurance. The less you drive any vehicle, the more likely you are to save money. According to one estimate, drivers could save 57% on auto insurance by driving 500 miles per month instead of 13,500 (the national average) and going with pay-per-mile coverage.


How does pay-per-mile car insurance work?

Pay-per-mile insurance plans typically combine a base rate plus a charge for every mile you drive.


What is a base rate?

Your base rate is the minimum amount that you’ll pay each month. It’s similar to a regular monthly car insurance premium, but usually is much lower. This figure will not change regardless of how much you drive your car that month. Insurance companies use different information to come up with a base rate, but they’re likely to use a combination of the following:

  • Car make and model
  • Your age
  • Gender
  • Address
  • Driving history
  • Credit score


What is a cap?

A cap is just another way of saying limit. Typically, pay-per-mile insurance programs will only charge you per mile up to a certain number of miles.

For example, let’s suppose that your pay-per-mile insurance plan has a cap of 150 miles per day. That means that you would pay for only 150 miles. If you drove more than 150 miles that day, the insurance company wouldn’t charge you for the additional miles.

A mileage cap or limit means that you don’t have to worry about cutting a trip short over the fear of driving too many miles. However, if you regularly drive more miles than the cap permits, you may lose your eligibility for pay-per-mile auto insurance.


How are your miles tracked?

Insurance companies typically keep track of your mileage in one of two ways. Most companies will use an electronic device that plugs into a port inside your car. Since 1996, all vehicles built for drivers in the United States have this port. Once the device is installed in the port and activated, it will automatically submit your daily mileage to the insurance company.

In some cases, these gadgets will also keep track of your speed and overall driving habits. If you maintain safe driving habits, they may provide an opportunity for additional savings.

If you drive a vehicle made before 1996, you might have to submit your mileage the old-fashioned way, by jotting it down and sending it to the insurance company. It’s also possible your insurance company may allow you to take a photo of your odometer each month as proof of your driving distance.


Who should use pay-per-mile car insurance?

To determine if pay-per-mile car insurance is right for you, you might want to ask yourself a few questions.

Is it difficult for you to make your current car insurance payment? If so, you may find that switching to pay-per-mile auto insurance reduces your payments to a manageable amount.

Are you insuring one or more cars that you rarely drive? That’s like paying for a complete meal when you’re only going to eat a snack. There’s a good chance that pay-per-mile insurance will save you money on cars that sit in parking space, driveway or garage most of the time.

Do you work from home or have a short commute to work? Some standard car insurance programs base their payment structure on the estimated miles the average person drives in a year. For some companies, the estimate may be 7,500 or more miles a year. If you don’t drive that much because your commute is shorter or you’ve stopped driving to work altogether, you might save by going with pay-per-mile auto insurance.


Is pay-per-mile car insurance worth it?

If you’re not keen on paying for something that you seldom use, pay-per-mile car insurance may be a good option. It allows you to control the cost of your auto insurance by limiting your driving. On the other hand, if you need to drive often or for long distances, it might not be right for you. Do your research to find out if switching to pay-per-mile insurance can help you save money.

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