How Pay-Per-Mile Auto Insurance Works

Drivers who don't put a lot of miles on their odometers are said to have a "good problem." Driving fewer miles reduces wear and tear on your vehicle, saves money at the gas pump, and lowers your chances of being involved in a car accident.

All of these things are positive. However, you may still be paying for car insurance that does not fully compensate you for your limited driving.

Pay-per-mile insurance is designed specifically to allow you to control your monthly car insurance bill based on how much you drive.

How Pay-Per-Mile Insurance Works

"There's a direct relationship between the miles people drive and the likelihood they'll be in an accident," says Rick Chen, a spokesperson for Metromile, a pay-per-mile insurance company that Lemonade plans to acquire in 2022. Even if you do not drive frequently, others do. And this can affect your rate because an increase in accidents, repair costs, and/or injury bills will raise rates for everyone.

"Insurers must account for these types of cases in their pricing," says Chen. "They spread it throughout their customer base."

However, insurers do offer low-mileage discounts, but the discount usually applies only if your mileage falls below a single threshold, such as 8,000 miles per year.

According to Teresa Scharn, associate vice president of personal lines product development at Nationwide Insurance, pay-per-mile insurance provides the same coverage types as traditional car insurance. Liability car insurance, collision and comprehensive coverage, uninsured motorist coverage, and roadside assistance are all included. However, you have more control over the rate you pay because it is based in part on the number of miles you drive.

Pay-per-mile insurance policies charge a daily or monthly base rate based on factors similar to those used to set rates for traditional insurance policies, such as your age, driving record, vehicle, location, and credit. As a result, the starting point will differ from person to person.

Then there's the per-mile fee. According to Scharn, the per mile rate varies from person to person depending on the factors used to determine the base rate. And the amount you pay will change month to month depending on how many miles you drive. Typically, the monthly bill is calculated based on the number of miles driven in the previous month.

Discounts may also be available. In California, for example, Metromile offers discounts for good drivers, mature drivers, insuring more than one vehicle, and having a vehicle-recovery device.

A pay-per-mile plan might look something like this: You pay a monthly base rate of $29 plus a 5 cent per mile rate. If you drive 500 miles in a month, you'll pay a total of $54 ($29 base rate plus 500 miles x $0.05 = $54).

Pay-per-mile insurance is not the same as usage-based auto insurance, which focuses on safe driving behaviors such as braking and speeding rather than actual miles driven.

How Miles Are Measured

Insurance companies must have an accurate way to measure your miles for pay-per-mile programs to work. The majority of people use a small device that plugs into a port near the steering wheel (called the OBD-II). Depending on the insurer, you may need a vehicle model year 1996 or newer for the device to work. Furthermore, some devices, such as Nationwide's, may be incompatible with hybrid vehicles.

Chen claims that the Metromile device tracks location in addition to mileage, but that the location service can be turned off for privacy reasons. If you keep it on, you can use the Metromile app to track and plan trips, track your gas spending by trip, and find your car if it's stolen. In Arizona and Oregon, Metromile has a feature that monitors driving habits and allows safe drivers to get a lower rate.

If you don't want to install a device in your car to track your mileage, Mile Auto, which requires policyholders to take a photo of their odometers once a month to report mileage, is another option.

Cost of Pay-Per-Mile Insurance

Pay-per-mile insurance rates differ from company to company. And, as with traditional car insurance, rates will vary from driver to driver.

Scharn, for example, claims that the base rate for Nationwide's SmartMiles program is roughly 30% of the premium for a traditional Nationwide car insurance policy. So, if your annual premium for a traditional policy was $1,000, your SmartMiles base rate could be around $300. According to Scharn, the average rate per mile is 6.5 cents but can range from 2 cents to 10 cents.

According to Liberty Mutual's ByMile and Mile Auto, customers can save up to 40% off their standard insurance rates. According to Metromile, its customers save an average of $741 per year. The website states that the base monthly rate begins at $29, but Chen claims that some Metromile customers pay less. According to Chen, the average per-mile rate is 5 cents to 7 cents.

Unlike other pay-per-mile insurance programs, Allstate's Milewise has both a daily and a per mile fee. A credit or debit card must be linked to your account, and costs are charged after a trip is completed.

Some of these programs impose daily mileage limits. So if you go on a long road trip, you won't be too hard hit. Metromile and Nationwide, for example, will not charge for more than 250 miles driven in a day, while Liberty Mutual will not charge for more than 150 miles driven in a day.

Who Benefits From Pay-Per-Mile Insurance?

Obviously, someone who does not drive frequently could save money by switching to pay-per-mile insurance. But what exactly is "not driving much"?

According to the Federal Highway Administration, the average American drives 13,476 miles per year. According to Chen, you'd have to drive less than that to save money with pay-per-mile insurance.

For example, if you were charged a base rate of $29 per month, a per-mile rate of 5 cents, and drove 500 miles per month, your monthly pay-per-mile car insurance would be $54. However, if you drive 1,123 miles per month like the average American, you'd pay about $85 per month.

When calculating how much you drive, don't forget to account for the amount of time it takes you to get there, especially if you spend time stuck in traffic.

"It isn't how much time you spend in your car. "The distance you're driving," Chen explains. "The majority of people simply do not drive at all."

Owners of cars who don't drive a lot of miles may include:

• People who use public transportation to get to work and only drive on weekends
• Individuals who work from home and do not commute
• People who have car leases with strict mileage restrictions
• College students who live on-campus
• Retirees who rarely drive

A pay-per-mile insurance plan may also appeal to drivers who want to save money based on actual mileage driven as opposed to plans that focus on driving behavior, such as usage-based car insurance.

Try It Before You Buy It

Keep track of your miles before committing to a plan if you're unsure whether pay-per-mile auto insurance is right for you. Metromile recently launched its RideAlong app, which tracks how many miles you drive over the course of 17 days and then calculates your rates and monthly bill if you were a Metromile customer.

Another option is to track your miles using a third-party mileage tracker app on your smartphone. There are free and paid apps that run in the background and track your driving distance. If you don't have consistent daily driving habits, such as commuting to work or school, this could be a good option for tracking miles.

How to Get Pay-Per-Mile Insurance

Pay-per-mile insurance is available from a few companies, including Allstate, Metromile, Mile Auto, and Nationwide. You can get rate quotes online for all four and get a better idea of how much you'd pay for coverage based on the miles you drive.

Pay-per-mile plans may not be available everywhere.

Get quotes from companies that offer a program in your state before switching to a pay-per-mile insurance policy. Then, compare your current policy to see if you can get the same level of coverage (or more) at a lower cost with a pay-per-mile program.

Drivers Interested in Mileage-Based Car Insurance See an Opportunity to Reduce Costs

According to a 2021 Telematics Consumer Survey conducted by Arity, a telematics and analytics provider founded by Allstate, nearly two-thirds (64%) of survey respondents are interested in mileage-based car insurance. Some drivers see this model as a way to save money on insurance.

41% of survey respondents consider themselves low-mileage drivers, and 39% see mileage-based car insurance as a way to gain more control over insurance costs. Other reasons respondents expressed interest in mileage-based insurance include the ease of participating in a program, keeping track of miles driven, and having more transparency into the cost of car insurance.

However, not everyone is a fan of mileage-based car insurance. 41% of those who said they were not interested said they were satisfied with their current car insurance. One-third of those polled said they are uncomfortable with their driving data being tracked. Other respondents (28%) believe mileage-based insurance would be too complicated, and 24% believe they will not save enough money with a mileage-based car insurance policy.