Consider this: You’re an urban dweller who spends the bulk of her time in the city. Work is in the city, along with all your friends. And everybody knows that all of the fun things to do are there, too. The only time you leave is to visit family or take a rare road trip.
There’s almost no need to drive your car. There’s a subway or bus a few blocks away or you might just walk. Over the course of a year, you may drive your car only a few thousand miles.
Although your insurance premiums might be slightly less because of the low number of miles you drive, you’re still paying to insure a car that you barely use. There may be another, potentially cheaper option. Some companies offer insurance by the mile. Here’s how it works.
The Standard Way to Set Rates
Traditional insurance companies base their rates on numerous factors – some you can control, others you can’t. The biggest factor is your driving record, but age, gender, marital status and where you live have a big effect on your premium. Of less importance are the make and model of your car, your credit score. prior insurance history and, of course, how much you drive (see How Insurers Decide Your Auto Insurance Rate ).
Here’s where it gets unfair. First, the reason auto insurance quotes vary by company is because they take into account their history of claims. In other words, you’re paying for other people’s accidents. That will be true of any insurance company to some degree, but should you pay an equal portion if you’re far less statistically likely to have an accident because you rarely drive?
Second, the number of miles you drive doesn’t get as much weight in the calculation of your premium as you would think. There’s a good chance that where you live and your marital status affect your premium more than how much you use your car. (To get up to speed on the topic before you buy, read Beginner's Guide To Auto Insurance .)
The relatively new concept of insurance by the mile aims to flip the model. The number of miles you drive determines your monthly rate. If you drove many miles in April, your rate will be higher for that month.
How By-the-Mile Works
Mileage-based rates aren't all the same. Some companies actually charge by the mile; others offer a more general type of discount on the car insurance premium to low-mileage drivers.
Metromile is a company that offers true by-the-mile coverage. Each driver pays a base monthly rate of around $30 per month, plus 4 cents per mile. According to Lauren Hartung, head of public relations for Metromile, the rate for some drivers could be much lower. “The flat fee and per-mile cost really does vary, as it takes into account the same things as traditional insurance including age, the type of car you drive, garaging address, etc. I've seen it as low as a $10 base rate and 1 cent per mile – and as high as a $100 base rate and 50 cents per mile.”
If your monthly rate is $30 and you drove 450 miles that month, you will owe $48. But what about those times where you go on an extended road trip? Under Metromile’s system, you only pay for a maximum of 150 miles per day (250 miles in Washington).
According to Metromile, low-mileage drivers customers can save more than $500 annually on premiums.
Metromile’s policies are underwritten by National General Insurance, a company that also offers a low-mileage option. This is not identical to by the mile, but does also save money if you don't drive a lot. According to the National General, a customer who drives no more than 2,500 miles per year could save 54% on normal premiums. Progressive’s Snapshot program works in a similar way: You may receive a discount of
up to 30%, but details vary by state. Allstate’s Drivewise also offers low-mileage discounts.
How They Know How Much You Drive
If all you know about your car is how to open the door, turn it on and drive it, you probably don’t know about the diagnostic port stealthily hidden somewhere near your hood release. (You know where that is, right?)
If you sign up for a by-the-mile or a low-mileage discount program, your auto insurance companies will send you a device to plug into this diagnostic port. Once it’s plugged in, it will begin sending data to the insurance company. The company will use information about how much you drive, your driving habits and the time of day you're on the road. When you drive between midnight and 4:00 am frequently, you’re more likely to have an accident, according to Progressive. Metromile believes that the amount of time you spend in your car is the biggest determining factor in the likelihood of having an accident.
In reality, relatively few Americans can get by-the-mile insurance so far. One reason: At present, only a few companies offer a low-mileage discount and even fewer offer true by-the-mile coverage. Metromile, for example, only offers by-the-mile coverage to customers in California, Illinois, Oregon and Washington. According to Hartung, “East Coast expansion is on the horizon for Metromile. We file for approval with the Department of Insurance in each state.…” Low-mileage discounts, on the other hand, are offered nationwide, but laws vary by state.
Next, technology. To receive National General Insurance’s low-mileage discount, your car has to work with OnStar. In other words, only General Motors vehicles are eligible for the discount. In addition, your car has to be new enough (a 1996 model or later) to have the diagnostic port.
Privacy and Technology Concerns
Of course, you also have to be OK with Big Brother spying on you while you drive the car. National General Insurance says that it only looks at your mileage, but Progressive says that it’s evaluating how you drive, when you drive and how much. Metromile says that it only uses mileage information to calculate your rate, but its app collects additional data.
However the companies vary, some believe the privacy concerns are minimal. They note that people give away far more information by using their cell phone and its various apps than they will under one of these programs. Some consumer advocates disagree, seeing this kind of tracking as a privacy risk as well.
Ashley M. Hunter, president of HM Risk Group says, “The use of GPS, how long you have been in the vehicle and driving habits may be taken into account, but by no means is the insurance company looking to use that information against you for some other purpose.”
Because these programs are so new, the technology powering them is still developing and lawmakers are struggling to keep up. According to Bruce Winterburn, vice president of industry relations at Vertafore, a provider of cloud-based insurance software, “Some states and local authorities have specific rules on tracking and disclosure requirements.”
As technology develops, not only will companies be able to better track drivers, companies will find more uses for the data including real-time traffic updates, safety innovations and more.
The Bottom Line
How we drive is changing. Driverless cars are no longer science fiction, services like Uber are changing peoples’ driving habits and technology is allowing companies to structure insurance premiums to usage rather than a flat rate.
But because by-the-mile insurance pricing is so new, the waters are muddy.
Ron Hettler, president of Hettler Insurance Agency says, “Don't assume the pay-per-mile insurance will be less; compare with traditional policies and speak with an independent insurance agent.”
In other words, just because you want only a few pieces of pizza, don’t assume that purchasing by the slice (not the pie) is the most economical solution.