While the National Association of Insurance Commissioners reports that the average annual cost for auto insurance has declined over the past year, some consumers may still be looking to save money on their policies. One way that consumers may choose to lower their insurance payments is by taking advantage of a program known as pay-as-you-drive (PAYD), also known as a usage-based program.

What is a PAYD program?

A PAYD program is a discount strategy that auto insurance companies use to encourage safe driving habits. While the details of this type of program differ between companies, most offer a basic percentage discount for driving under a certain mileage or exhibiting safe driving behavior, says Loretta Worters, vice president of the Insurance Information Institute.

“The idea behind usage-based programs is to give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully,” Worters says.

Susan Pedersen, vice president of Bernard E. Pedersen & Associates, Inc., says the program can be extremely beneficial to drivers looking to lower their rates.

“We love it at our agency,” Pedersen says. “People are getting a massive discount that doesn’t drop off after a year or two.” Based on the driver’s habits, the discount can be up to $200 annually, she notes.

How does PAYD insurance work?

There are two types of products that insurance companies offer, Worters says. The first are simple mileage-based programs, where the odometer is checked at the end of a policy period or by a device installed in the vehicle.

The second are performance-based programs, where drivers voluntarily install a device into their car to monitor their habits.

“The device collects information about the driver’s behind-the-wheel behavior, such as speeding or sudden braking that may show a disregard for, or a lack of familiarity with, safe driving behavior,” Worters says.

For performance-based programs, drivers must successfully pass an initial testing period to qualify. The device will monitor driving behavior for about four months.

“What[the insurance companies] are trying to track is your speed, if you stop on your brakes too frequently, if you are driving in a lot of traffic, or how often you accelerate quickly,” Pedersen says. Driving late at night, between midnight and 4:00 AM, is also considered risky behavior, she adds.

During the initial testing period, you can log on to a website to view your mistakes. After the testing period, the company will determine if you qualify for a discount. The length of the testing period differs depending on the company. Some companies may bill you for the device or reserve the right to test your driving again, while others only test once.

Who can benefit from a PAYD program?

Pedersen says that depending on the insurance company, anyone can benefit from the program, including seniors who don’t drive often or parents who want to monitor their teenage drivers.

“Parents love it because they like to be able to sign in to the website and see what their kids are doing,” she explains.

Those who drive fewer than 15,000 miles a year, such as people who work from home, commute by public transportation, or own a secondary car, could save 10 to 15 percent of their insurance bill by enrolling in a PAYD program.

Why don’t all drivers opt for PAYD?

Drivers who put a lot of mileage on their car, have unsafe driving habits, or drive constantly in traffic or between midnight and 4:00 AM, may not qualify for a PAYD program and may instead have to opt for a more traditional auto insurance policy.

Some drivers are also concerned about the privacy factor. “People don’t want to be tracked or monitored—it’s too much like ‘Big Brother,’” Pedersen explains.

But Worters says most people now view these types of programs as an opportunity to save money. She cited a 2013 study from comScore, which reported that just a quarter of respondents indicated that privacy is “very much of a concern” when it comes to PAYD.

If you are interested in exploring a PAYD program, contact your auto insurance company. While not every company offers a usage-based policy, those that do include Progressive, State Farm, Safeco Insurance, and Allstate.

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