Pay-By-Mile Insurance: Is It Right for You?

Car insurance continues to evolve with the advent of pay by the mile insurance. This innovative new option is designed to deliver low cost car insurance to those who drive infrequently and for many, its operating model will feel very familiar.

How does it work?

There are a number of options and the many different auto insurance companies offering this new type of cover have structured their offerings slightly differently, but in essence, you pay a flat fee for “parked” cover which covers the vehicle for loss or damage whilst not in use, then a separate fee per mile driven. [1]

Some pay per mile car insurance policies allow you to set a mileage for the year, top up for the first hundred miles, then top up again every time you get near the end of the hundred miles, while others operate on a pay as you go basis, billing you in arrears on a monthly basis for actual miles driven.

Some of the policies now available even allow you to use them as a subscription service [2], offering a rolling monthly contract with no fees for exiting, so should your circumstances change, you are able to leave the contract with no penalties and take out a standard annual car insurance policy.

When you sign up for a pay by the mile car insurance policy, you will be sent a telematics device which has to be fitted to the vehicle and which will record your mileage, reporting it directly to the insurance company in order that you can be accurately billed for miles driven in the vehicle.

Who would benefit from this type of cover?

There are many people for whom this type of cover will prove invaluable:

The elderly. Elderly drivers who only use their car for short journeys, especially during off-peak hours during the day, are considered to be low risk anyway by many insurance companies. Pay by the mile car insurance is likely to benefit them, saving them a considerable amount of money per year.

The young. Young driver policies can be exceedingly expensive – often the first year’s insurance will cost more than the car did to buy – and adding a young driver as a named driver on a parent’s policy often doesn’t allow the young driver to accumulate a no claims discount of their own. With pay by the mile insurance, they are able to build their own no claims discount but at a lower cost due to a reduced time spent behind the wheel. This type of policy may also suit students who are only likely to use their car at weekends and during school holidays.

Home workers. People who do not need to commute into an office and therefore only use their car sporadically, for shopping trips, the school run or holidays, can often benefit from a pay as you go form of car insurance as their car will spend a lot of its time parked up safely on the drive making them a low risk for the insurance company.

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How is the policy fee calculated?

The “parked” element of the policy is calculated as per any other car insurance policy, based on the risk of the individual and their vehicle. The insurance company will take into account the driver’s age, driving experience, no claims discount, the type and age of the vehicle, and where they live in order to calculate an appropriate fee. It will also consider whether the driver wants third party, third party fire and theft or fully comprehensive insurance.

The pay per mile element is then determined based on the mileage requirements of the driver. Essentially, the fewer miles you sign up to, the cheaper the policy is.

Sounds great, are there any pitfalls?

There are four main things to watch out for with a car insurance pay per mile policy:

1. Some policies will penalise you by increasing the price per mile if you go over the mileage that you agreed at the start of the policy and this can raise the price of the policy to the point that it is no longer comparable with or cheaper than a standard annual insurance policy. So be honest about the mileage that you anticipate doing – don’t underestimate to save costs because it is unlikely to be successful in the long run. This is also not the case for all providers – there are some that purely charge retrospectively for the actual miles driven, regardless of how accurate your initial estimate was.

2. Most of the pay as you go policies have an excess of at least £250 which is more than a standard annual policy where you can get an excess of as little as £100. This might not seem a major issue up front but it is a larger sum of money to find should your car be damaged or if you are involved in an accident. It is worth considering whether you can lay your hands on this amount of money straight away if you need to at any point before taking out a policy with a higher excess. If you are not certain that you could find £250 immediately, then you should consider how much cheaper the pay as you go policy is than a standard annual policy to determine if the trade-off is worthwhile.

3. Some pay as you go policies have restrictions on when you can use your vehicle so if you plan to use the car during peak times (for example to drop children off at school) then you should ensure that the policy you are interested in will cover you to drive during these times. This is not the case for all policies of this nature but if you know that you will use your car during rush hour then it is an important consideration and something that you should make sure to check before agreeing to the contract.

4. Most pay per mile car insurance policies do not cover business mileage so if you use your vehicle for work, you are unlikely to be eligible for this type of policy. However, even if you were able to take out a policy of this type with business cover included, it is unlikely that it would represent adequate value for money as your annual mileage would likely be higher than that for which a policy of this sort is designed.

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Why is insurance cheaper for lower mileage drivers?

This is down to the risk appetite of the insurance companies and simple maths – in essence, the less time you spend behind the wheel, the lower the likelihood of you having an automotive accident and needing to claim on your policy. This is especially true if you regularly drive during off-peak hours when the roads are quieter and rarely spend time on the road during rush hour.

Because the risk to the insurance company is lower, they are able to offer more competitive rates to these drivers. And yes, they will know. This is because the telematics box that is required to be fitted to your vehicle to be eligible for a policy such as this records your mileage, often including the time and date in order to accurately bill you, so if you plan to exceed your stated mileage or drive during time periods which you have been advised are not covered, you could expect your policy to be invalidated and possibly cancelled without warning.

How do I work out how much mileage I’ll do in a year?

If you have had your car for a number of years, you will be able to check the mileage on each of your MOT certificates and the difference between the most recent and the previous one will give you an indication of the mileage that you do in a typical year.

If you haven’t had your car long enough to put it through two MOTs but it is still covered under a valid insurance policy, you can make a note of your mileage at the start and end of a standard week and multiply this by 52 to give you an average annual mileage figure.

If you are planning to take out your first insurance policy or have just bought your first car, you will be working entirely off guesswork but you could make a reasonably accurate estimate by calculating the distance between your home and work or college and any other places you will spend time, multiplying this by the number of journeys that you anticipate undertaking in an average week and multiplying this by 52 to give you a rough estimate of what your annual mileage is likely to be.

If you are really uncertain about how many miles you are likely to cover in a year, then you could either use one of the sums above and add a couple of hundred miles to add a safety margin or consider whether insurance pay per mile is actually appropriate for your circumstances.

How do I know whether pay per mile insurance will be appropriate for me?

If you fit into one of the categories listed above of people who are likely to benefit from a pay per mile car insurance policy, then it is worth seeking some quotes and comparing them against a standard annual policy to see whether you are likely to make significant savings by opting for a pay per mile policy.

If you are a regular car driver who often drives long distances, commutes regularly into an office or you are likely to cover more than 5000 miles in a year, then you are much more likely to be better off financially with a standard annual policy. It is important to remember that even on a standard annual policy, you should estimate your mileage with as high a degree of accuracy as you can. If you need to make a claim and your annual mileage has been substantially higher than initially declared, there may at the very least be some issues with renewal and potentially the validity of the policy if your application is deemed deliberately misleading.

The Free Price Compare car insurance comparison tool is designed to allow you to test the market and get no-obligation quotes specifically based on your individual circumstances so that you can select the policy that provides you with the cover that you need at the lowest possible price, without compromising on customer service, quality of cover and without any hidden fees.

Our tool will allow you to run as many variations as you need to in order to understand what your options are and the difference that your planned annual mileage will make to either type of policy.

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Is this a good option for people on a budget?

Yes and no.

Yes – if you are honest and will genuinely be doing a very low mileage, then a pay as you go insurance policy may work out cheaper overall than a standard annual policy and save you money. You should still compare a pay as you go policy against a standard annual policy using our free online comparison tool to ensure that you are getting the best deal.

No – if you are likely to exceed your stated mileage or would prefer the certainty of the same bill every month rather than the pay per mile element changing based on your activity, then you would be better off with a standard annual policy.

If you are concerned about budgeting and paying for a car insurance policy, then you may find that help with money management and financial planning which is available from the Money Advice Service [3] and Citizen’s Advice [4], both of which are free to the user, will improve your confidence at handling your money and ultimately help you to choose the most appropriate insurance policy for you.

References

• [1] www.which.co.uk
• [2] www.which.co.uk
• [3] www.moneyadviceservice.org.uk
• [4] www.citizensadvice.org.uk