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A New Way To Save Money On Car Insurance

Auto insurance premiums can take a bite out of any family’s budget. As recent studies have shown, these premiums can swallow up as much as 8% of a person’s income. With most drivers still feeling the pinch of a struggling economy, more insurance companies and states are introducing a new approach to calculating premiums. This method is known as Pay as You Drive or PAYD.

As of August 2012, 34 states have passed laws to permit PAYD insurance. With this approach to coverage, drivers’ premiums are influenced by how little or how much they drive. This makes sense because the more someone is on the road the more likely he or she will be to have an accident. Low mileage drivers are less risky and, therefore, should pay less in premiums. Of course, other factors also go into the calculations, such as driving record, age, marital status, and often credit score. However, keeping the car in the garage can be one way to offset some of the increases brought about by these other factors.

PAYD works in different ways depending on the insurance company. In some cases, the odometer is checked and used to calculate the discount. In other cases, driving habits are monitored using equipment placed in the car. The latter option may seem more intrusive but it does offer faster feedback to insurers and thus quicker premium reductions for the insured.

Proponents of PAYD see more benefits than simply cost savings with this approach. They also believe it could be better for the environment by encouraging more drivers to choose alternative means of travel. If fewer drivers were on the road, carbon dioxide emissions would decrease as would oil consumption. Fewer cars on the road also mean fewer accidents – another potential benefit of widespread PAYD adoption.

Others point out that PAYD systems are fairer because they base premiums on the risk of that driver instead of on people who happen to share demographic factors. For example, conscientious male drivers who spend less time on the road might pay less than a female driver who spends hours a day commuting. Younger drivers might also reap the benefits, too, because they typically drive less than their older counterparts.

Regardless of the benefits, PAYD does have some negative aspects as detractors have pointed out. Many opponents point out that the devices used to monitor driving behaviors are infringing on the driver’s privacy. In some cases, GPS systems are used to monitor the vehicles so that every location that driver visits is monitored. Of course, the current systems do this with the driver’s permission. In the future, opponents argue, drivers may be forced to use these devices in order to purchase insurance at all.

Another issue is that the PAYD system is based on future risk and is, therefore, not going to perfectly predict a driver’s likelihood of having an accident. The same argument could be made for the current system, however.

As more states make PAYD available to drivers, more people will be able to experience those potential benefits and weigh them against those negatives.