What is pay-as-you-go car insurance?

This article has been updated from a previous version.

Car insurance is not an inconsiderable expense. Of course, more inexperienced drivers and those with spotty driving records will pay more than experienced drivers with clean records.

That is a strong disincentive to urbanites who use public transit to get to work and want a car for evening and weekend outings only. But the cost of rental cars adds up, and lugging groceries home via public transit, or a bundle buggy isn’t anyone’s idea of a fun Saturday afternoon.

Enter pay-as-you-go car insurance.

What is pay-as-you-go car insurance?

Pay-as-you-go car insurance is a flexible policy where premiums depend on how often and how far you drive. This means cheaper premiums for those who don’t travel many miles.

This type of insurance is usage-based, so instead of predicting risk based on statistics, this insurance focuses on your actual driving behavior.

Your policy is tailored to how you drive, not just generic factors like age or car model.

How does pay-as-you-go insurance work?

The model is simple: you prepay a modest base daily premium for pay-as-you-go car insurance. You’ll also pay an additional charge based on how much you drive.

You’ll start with an initial 1,000 kilometres. As you drive, you will be charged for additional distances in 1,000-kilometre increments.

A telematics device in your vehicle or an app on your phone clocks the kilometers the car travels. The device only tracks distances, unlike those that monitor driving performance such as speeding or harsh braking (programs known as pay-how-you-drive).

Read more: How much can good drivers save with usage-based auto insurance?

The device is linked to a web portal or mobile app so drivers can keep track of their mileage, and they are sent a warning when they are nearing the end of a 1,000-kilometre increment.

Pay-as-you-go car insurance policies are typically capped at 12,000 kilometers per year. If you exceed this number, you’ll be switched to a non-usage-based policy and rate.

Who can benefit from pay-as-you-go car insurance?

There are a variety of scenarios under which mileage-based insurance makes sense for customers:

• Those who work from home — an increasing number since the arrival of COVID-19 — or take public transit to work would benefit from mileage-based insurance.
• A family with several cars can pay a full annual premium on a commuting vehicle and restrict others to occasional driving.
• Urban drivers who only use their vehicles for trips to a cottage or vacation property, or occasional shopping trips, could benefit.
• Seniors or retired people who do not commute to a workplace could also take advantage of this type of policy.

Other than the payment option, the pay-as-you-go policy works exactly like any other insurance policy. The claims process is the same as conventional insurance. The qualifying process considers driving records, claims histories, and traffic offences the same way a conventional policy does.

Pay-as-you-go insurance is a good option for drivers with low and predictable kilometre requirements; a sudden spike in mileage, for example, from changing to a job that is not conveniently accessible on public transit, could put you over the ceiling.

Learn more: How to save on car insurance

If you are on the 12,000-kilometre fence, you might want to look at a pay-how-you-drive program offered by other insurance providers. If you drive more than 12,000 kilometres a year, the discount you may earn (25% to 30% based on your driving behaviour) could be more worthwhile.

According to CCA in 2022, on average, Ontario drivers save 50% on their auto insurance premiums with its MyPace, a pay-as-you-go-plan, compared to a traditional policy.

CAA Insurance has been offering MyPace in Ontario since 2018, which is Canada’s only pay-as-you-go insurance payment program to date.

Is this type of insurance available everywhere?

Pay-as-you-go car insurance is only available in Ontario, New Brunswick, Nova Scotia and Prince Edward Island.

The reason why the rest of the provinces don’t have it is because this type of insurance has not been approved to date by the respective provincial regulators.

While insurance providers can track mileage and driver behaviour using telematics for discounts, they don’t use it on a pay-as-you-go basis.

Regardless of where you are in Canada, know that pay-as-you-go car insurance is different from regular policies. It adjusts your premiums based on how much you drive. So, if you don’t drive much, you pay less. It’s great for remote workers, occasional drivers, and retirees with predictable mileage.

Learn more: How can young drivers save on car insurance?