Quite simply, this type of car insurance charges people according to the actual miles they drive rather than an estimated figure. After an initial amount to cover risks like theft that happen when a car is parked, policyholders then either pre-pay for a certain number of miles and top up if necessary – often called “pay-as-you-go car insurance” – or receive a monthly charge to their account for the miles driven over that period.
Using a telematics – or “black box” – device, the insurer monitors your mileage and makes the necessary charges, or alerts you when you come close to passing your pre-paid mileage limit so you have time to consider your options.
Annual car insurance policies ask for details of the driver’s yearly mileage – this is a key risk factor the insurance underwriter considers when calculating your annual premium: the more hours or miles you spend behind the wheel, the greater the risk of you having an accident and claiming on your policy.
Here’s an example of how the mileage you declare can affect your premium:
Using the Uswitch car insurance price comparison tool: For a middle-aged man with 20-years’ no-claims bonus and living in an East Midlands town who drives a seven-year-old 1.4 litre estate car with a voluntary excess of £250:
- Declaring 1,000 miles a year: cheapest quote of £228 - Declaring 6,000 miles a year: cheapest quote of £279
This shows that, generally, the greater number of miles you declare when arranging your policy, the higher the premium is likely to be.
And you must not lie or unreasonably underestimate the number of miles you drive a year as this could invalidate your policy if you have an accident and need to make a claim.
However, there are quirks within the system, with some people seeing premiums rise when they cut their mileage estimate.
This is based on the risk-based system used to determine premiums - for example, only driving a few times a week could be a result of driving only in the evenings and at weekends, when accidents are more likely.
It’s a form of telematics, or “black box”, car insurance. You’ll be sent a telematics device that you fit to your car which monitors your mileage. The device may also link up with an app on your mobile phone, so you can monitor precisely how many miles you drive and how much you are paying for each trip.
The most common pay-by-the-mile policies consist of two separate fees:
A single, annual charge that covers your vehicle when not in use
A charge per mile rate, based on your particular risk factors and your declaration of how many miles you drive annually
For the pre-paid pay-per-mile policies, you will be notified through your mobile app when you are approaching the limit of miles that you’ve already paid for. At this point you can top up by paying for extra miles.
Be warned, however, if you’ve underestimated your annual mileage to get a cheaper price and run out of miles several months before your policy ends, you may be charged a higher per-mile rate for topping up, or even risk having your policy cancelled.
For some, however, it doesn’t matter if you exceed your estimated mileage. By Miles, for example (four out of five stars on Defaqto, five stars Moneyfacts, 4.7 stars on Trustpilot) charges each month for the miles you drive, whether you estimated five miles and drove 500, or estimated 500 and only drove five.
This type of car insurance was designed specifically for those who drive least often – for example:
Infrequent, short trips – shopping, school runs etc
Students, who may only use their vehicles for occasional trips home, or during holidays
Young people who only use their cars for leisure and find annual insurance too expensive
Retired people who no longer need their vehicles for commuting to work
Conversely, this type of car insurance may not be suitable for those who make frequent use of their vehicles – such as for:
Daily commuting between towns or cities to work
Continental driving holidays
Similarly to annual insurance, several risk factors are taken into account when assessing the cost of your premium. These include:
Age and driving experience
Where you live and park your vehicle
Make and model of your car
Your car insurance claims history
Younger and less experienced drivers will still pay more than those with several years behind the wheel without claiming, but they can save money over the cost of an annual policy.
Let’s look at some comparisons:
Example 1: can experienced drivers save money?
The same middle-aged man as above, insuring the same vehicle with one of the better-known and well-trusted (TrustPilot star rating of 4.7 out of 5) per-mile insurer, By Miles.
By Miles’ quote calculator provided the following two prices:
- A standing charge for the year of £172 - A driving charge of 3.2p per mile
While it asks for a mileage estimate on its online quote generator, you will be charged the same rate, no matter how many miles you drive. Thus:
- 100 miles – £175.20 - 1,000 miles – £204 - 6,000 miles – £364
The annual insurance quote for declaring 1,000 miles was £228. Thus, a saving of £24 is enjoyed for using pay-per-mile insurance. However, once this example’s mileage rises to 6,000 a year, the annual policy is cheaper.
Example 2: how much can drivers with limited experience save?
A 25-year-old with five years of no claims, living in the same East Midlands town to insure the same seven-year-old estate car paying £250 voluntary excess. Quotes accessed in February 2021:
Cheapest non-telematics annual policy, annual mileage of 1,000 declared - premium cost: £643
By Miles pay-per-mile car insurance - 1,000 miles declared:
- Standing charge of £305 a year - Price per mile of 3.7p
A total premium of £341.75, and a saving of more than £300 over the annual policy.
The 25-year-old can actually afford to drive more than 8,000 miles a year on the pay-per-mile policy and still save on the cheapest annual policy.
By Miles only insures those above the age of 25, so a 19-year-old who qualified to drive just over a year ago has fewer options. Nevertheless, there are several other pay-by-the-mile insurers that can save this young driver money.
Example 3: can teenage drivers also save money?
Here we’re using Marmalade, (Trustpilot 3.4 stars) which specialises in car insurance products for young drivers. This 19-year-old lives in the same East Midlands town and drives the same 1400 estate borrowed from a parent as a named driver.
Annual policy declaring annual mileage of 1,000 and paying a voluntary excess of £250 – cheapest non-telematics-based quote: £3,170
Marmalade – initial charge of £295 for 500 miles, then £37 for each top up of 100 miles.
To drive 1,000 miles a year, the annual cost would be:
- £295 for 500 miles + (£37 x 5) for the additional 500 miles = £480
This represents a massive saving for the 19-year-old driver who drives only a few miles a year in a borrowed car. Furthermore, if he or she claims on the policy it will not affect the no claims bonus of the parent.
As the above examples show, younger, less experienced drivers can enjoy huge savings over a standard annual policy by using a pay-by-the-mile car insurance scheme. Older drivers can also save, but it may be cheaper for them to take out annual insurance if they are driving more than a couple of thousand miles a year.
There are some other limitations to this type of car insurance:
Not all offer insurance to younger drivers – By Miles, for example only offers policies to the over 25s
Some will not offer insurance for expensive cars – Marmalade will not insure vehicles valued above £30,000
Some will only offer pay-per-mile insurance to younger people as named drivers in a parent’s vehicle
Some pay-by-the-mile insurers will increase the price for top up mileage if the annual estimate is exceeded
All pay-by-the-mile car insurance policies offer comprehensive cover. This may include as standard:
Full cover against accidents, vandalism, fire and theft
Cover for contents in the vehicle
Windscreen replacement and repair
Medical costs following an accident
Injury to passengers in the vehicle
Both use a “black box” telematics device fitted to your car. The basic difference is one charges for how far your drive, while most black box polices charges are based on how and when you drive.
Pay-by-the-mile policies are tailored specifically for those who drive only a limited number of miles per year. While the insurance company will monitor you through a telematics device, it is only interested in the number of miles you drive.
Black box insurance monitors driving behaviour – such as speed, braking, acceleration, as well as where and when you drive – and bases its renewal premiums on analysis of how carefully you drove over the year.
Thus, pay-per-mile insurance is typically more suited to infrequent drivers, as its pricing is based on the reduction of a single risk factor – time spent behind the wheel. Black box schemes may be better for young drivers who need to cover more mileage a year.
Several companies now offer insurance priced by the mile. They can differ quite widely in the terms they offer and how their policies are priced. Here are some examples:
By Miles – used in some of the examples above, was the first company in the UK to offer pay-by-the-mile car insurance. Launched in 2018, it offers cover to the over 25s using a two-pronged pricing strategy: a single, annual charge for the car, and monthly payments for the miles you drive
Marmalade – also seen above, was founded in 2006 to provide telematics-based insurance for young people. Its pay-per-mile product is for named drivers in a parent’s car and priced for an initial 500 miles, with 100-mile top-ups available
Insure the Box – offers different mileage packages and top-up miles. It will also add bonus miles for careful driving
By Miles is the best rated by customers on Trustpilot (4.7/5 stars). Here’s what they’re saying on its customer review portal:
“Simple, fair and accurate way of insuring my car.”
“Perfect service for customers who are environmentally minded and try to reduce their carbon footprint. Also helps tremendously that I’m saving a fortune.”
Marmalade is rated 4.5 stars on Trustpilot. Here’s what its customers have to say:
“Marmalade were by far the cheapest around and arranging insurance for my daughter online was straight forward and super easy. Highly recommended.”
“Quick and easy. Much cheaper than I expected.”