Can Pay-As-You-Go Auto Insurance Save You Money?

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If you're driving less, you might be eligible to spend less on auto insurance with pay-as-you-go plans. But these per-mile policies come with some drawbacks.The pay-as-you-go trend has already spread to a wide variety of consumer services ranging from wireless to software. Now it looks like auto insurance might be the next industry to jump on the bandwagon.

The idea behind it is simple: People should only pay for the insurance coverage that they actually use. In other words, drivers who drive less would pay less for insurance.

Consumer groups and some economists have demanded this type of coverage for years, and their lobbying has paid off. Last month, Progressive Insurance began advertising its Snap Shot Discount pay-as-you-go product nationally. Its available in 32 states.. State Farm and Allstate also offer similar deals in a handful of states.

Texas spearheaded the movement: It was the first state to allow such coverage back in 2001, while California -- a state that often begins auto trends -- only began permitting it in December.

Big Discounts for More Data

The industry argues that these policies can save consumers a bundle. Progressive estimates potential savings of $150 a year, for example. "Pay-as-you-go insurance can be an excellent choice for people who drive very few miles during the week," Chris Kissell, managing editor of Insurance.com, writes in an email.

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But experts caution that pay-per-mile policies aren't right for everyone. For one thing, to determine eligibility, insurers typically install a device that tracks customers' driving habits for some time -- usually about six months, Kissell says. "Some drivers may not be comfortable with this and may see it as an invasion of privacy," he writes.

Some of the programs also have strict rules about when customers can drive and may disqualify customers from getting the discount if the tracking device shows that they often drive late at night, he adds.

An Invasion of Privacy?

Progressive's program has drawn the ire of consumer groups because it requires drivers to install a "Snapshot" device, which monitors how far -- and when -- people drive. The device, about the size of a garage-door opener, collects data for 30 days before the company decides if a driver is eligible for the pay-as-you-go discount.

Carmen Balber of Consumer Watchdog argues that drivers should not have to give up their rights to privacy to get a good rate on car insurance. She also argued that drivers who are on the road late because they work the late shift are unfairly penalized by these programs.

Progressive, the fourth-largest auto insurer, began working on the concept of usage-based insurance in
1998 and made it broadly available in 2008. It rejects the notion that consumers are getting a bad deal, saying that about a quarter million drivers have signed up.

"Snapshot is best for people who drive less, in safer ways and during safer times of day," Brittany Senary, a Progressive spokeswoman, writes in an an email. "Those are the drivers who are most likely to get a discount." Drivers' rates are guaranteed not to increase as a result of Snapshot, she says, adding that the discount isn't based on location or speed. "The device does not have GPS, so we don't know where the car is," she writes.

More Per-Mile Programs

Like Progressive, Allstate also requires drivers to install a vehicle-monitoring device about the size of a pack of cigarettes to quality for its per-mile policy. Customers get a 10% discount for enrolling in the Drive Wise program, which launched in Illinois in December and could expand to other states this year, and could be eligible for additional discounts, depending on their driving habits. "Is a rewards-based program," spokeswoman Stephanie Sheppard says in an interview. "There are no penalties."

State Farm's Drive Safe and Save program gives customers a 5% discount for enrolling, as well as the possibility of additional discounts depending on the miles they drive. The program is currently offered only in California and Ohio, although the company plans to expand it to Illinois and Texas. In California, drivers can simply report their mileage, but in other states, State Farm only enrolls drivers whose vehicles are equipped with On Star, which can track vehicles' miles. As with Progressive, the savings from this plan can be considerable, but also can vary widely.

Saving the Environment

Not only does usage-based auto insurance save consumers money, it's also good for the environment, according to a 2008 report from the Brookings Institution,

"Just as an all-you-can-eat restaurant encourages more eating, current insurance pricing encourages more driving," the report says. "The extra driving that results from this inefficient system leads to more accidents, more congestion, more carbon emissions, more local pollution, and more dependence on oil. This pricing system is also inequitable because low-mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average."
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