Traditionally, the price of car insurance is set at the beginning of a policy with drivers either agreeing to pay their premiums in monthly instalments, or as a lump sum on an annual basis.
This type of motor policy works well if you drive a lot and can estimate accurately how many miles you’re likely to clock up in a year. It’s less cost effective, however, for motorists who don’t drive very often.
For this type of driver, some insurers offer ‘pay-as-you-go’ (PAYG) car cover. Here’s the lowdown on PAYG insurance and why it might be right for you.
How does PAYG car insurance work?
In essence, it offers cover on a rolling subscription. There is usually a monthly or annual charge that covers the car against damage or theft while it’s parked, plus charges based on how much you drive or your actual driving skills.
Telematics, black box, or tracking devices are key to PAYG insurance. Attached to the car in question, some gadgets log mileage, but others record factors such as speed and even log data such as a vehicle’s cornering.
This information data is then used to determine how much you’ll pay for your car insurance. The tracker is normally linked to a smartphone app so you can see how far, or how well, you are driving.
Different types of cover
PAYG car insurance is a catch-all term covering several types of cover.
For example, pay-per-mile car insurance is based on how far you drive each month. Suitable for low mileage drivers, this type of cover means paying a low monthly premium to insure your car while it’s parked, then a fee for each mile you drive. A tag or tracking device placed in your car measures the mileage.
Policies offered pay-by-mile insurers work in different ways. For instance, with the provider Marmalade you buy a policy that comes with an initial 500 miles. Customers can then choose an automatic top-up amount of 100, 200, 300, 400 or 500 miles that gets added to the cover once you’re down to the last 50 miles.
By contrast, with By Miles you pay a fixed annual cost to cover the car when it’s parked and its app shows you how much each day’s driving has cost. You then pay for what you’ve driven over the month.
Rather than focus on distance, some insurers offer policies based on time and how long you drive for. As with a pay-per-mile policy, there is usually a fee to cover your car while it’s stationary, while the rest of the premium is worked out based on how much time you spend on the road.
Insurers, such as DayInsure, Cuvva and Tempcover, offer insurance by the hour if, for example, you needed to borrow someone else’s car but where your name hasn’t been added to the main driver’s insurance.
Telematics car insurance, also referred to as ‘pay how you drive’ insurance, calculates your premiums based on how safe a driver you are. A tracking device or black box placed in your car monitors your driving.
Telematics car insurance is usually targeted at young drivers who would otherwise face extremely high or just plain unaffordable car insurance premiums.
Insurers that offer telematics car insurance include Direct Line, Insure The Box and Marmalade.
Who should take out PAYG insurance?
Different types of PAYG car insurance suit different types of drivers. For example, experts suggest that pay-per-mile policies are best for drivers travelling less than 7,500 miles a year.
This type of insurance may work out cost-effective for people who don’t drive very often. If you live in a busy city, a pay-per-mile option may work out to be better value than pay-per-hour cover, as busy traffic can result in a short journey taking a relatively long time.
Pay-per-mile insurance can also be good for families that own a second car that doesn’t see much use.
Each to their own
The insurer, Marmalade, suggests that young people driving their parents’ car get their own per-miles policy. This enables them to start earning their own no claims discount which will make insurance cheaper in the future. What’s more, if they do make a claim, it won’t affect their parents’ no claims discount.
Telematics policies are generally targeted at young or inexperienced drivers who would otherwise pay a high car insurance premium. It means they will be charged car insurance premiums based on their own driving skills, rather than the typical driving characteristics of someone their age, driving a similar car and living in an area with a similar risk profile.
How do you buy PAYG insurance?
You can buy PAYG car insurance via comparison sites or directly from insurance companies. When you enter your details on a price comparison site it will ask you how many miles you typically drive each year. If you put in a low mileage, you’re likely to see PAYG car insurance premiums among your search results.
Alternatively, if you’re sure you want PAYG cover, you can go directly to a provider offering this type of cover, such as the RAC, Marmalade, or By Miles, and ask for a quote.
In most cases, these policies offer the same levels of cover to traditional car insurance policies. You can choose from third party, third party, fire and theft, and comprehensive cover. As with mainstream policies, there will be an excess to pay if you need to make a claim. The excess is the amount the policyholder agrees to pay on a claim before the insurer picks up the remainder.
What should you look out for?
Before deciding on a PAYG car insurance policy, it’s important to make sure that it’s the most suitable option for you. Remember, if you rack up more than 7,500 miles a year driving, a normal annual car cover policy will probably work out better value.
What’s more, if you are a safe, experienced driver, you’re unlikely to save money with a telematics policy. Mainstream car cover is likely to be best for you.
As with any insurance policy, there are some exclusions to PAYG car insurance policies which are worth establishing before taking out a policy. For example, drivers are not covered for commercial purposes, such as taxi hire or food delivery services. PAYG won’t cover drivers either, who plan to use their cars for racing or rallies.
Tampering with the tracking device will almost certainly invalidate your policy, as will driving under the influence of drink or drugs.
Pros of PAYG car insurance
Potentially a cheaper option for motorists with low annual mileage or those who drive only occasionally
Telematics policies can help young or inexperienced drivers save money
Useful for budgeting as there’s no need to pay for annual cover in one go
Flexibility, as some policies allow you to cancel at any time
Cons of PAYG car insurance
Policies can work out expensive for drivers who clock up miles than planned
Telematics policies sometimes charge you more if you drive at night.
Telematics can work out expensive for policyholders with bad driving habits