How Does Pay-Per-Mile Inexpensive Car Insurance Work?

Remember when cell phone plans first came out? The ones where you got charged a flat rate for however many minutes you used? Then came the pay-per-minute plans, or those with a certain number of minutes included, and they were a hit with customers. After all, it makes more sense to pay only for the minutes you talk.

Well, if your automobile insurance rates are based on the risk of you getting into an accident, does it sound fair that you're charged the same amount whether you drive 1 or 1,000 miles every month? A new inexpensive car insurance system could change that.

Pay-per-mile auto insurance let's you pay only for the miles you drive. This means that the less you drive, the cheaper your auto insurance. Here's how it works:

The per-mile cost is calculated based on driving record, vehicle type and geographic location, which are already taken into account when calculating your rate anyway. The insurance company would get periodical readings from the odometer or sensors installed in your car. On average, this comes out to between 2 and 10 cents per mile.

As a positive side effect, some drivers, looking to reduce the cost of their auto insurance, may enforce money saving driving habits, which would also save gas. According to an UC Berkeley study, this would mean driving would be cut by 9%, with insurance savings of up to $8 billion every year, and more than $9 billion savings in reduced congestion.

Although high-mileage drivers may end up paying more, what this system guarantees is that low mileage drivers will no longer subsidize them. It is also a more accurate way of judging the accident likelihood of drivers, since driving more increases your risk.

So far the system has plenty of supporters on the consumer side, but not many on the insurance company end. Legislation in at least 27 states would permit a pay-per-mile arrangement, including Texas, which is explicitly set up for this type of system. A pilot program is currently under way in Washington.

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