If you work from home, mainly use public transport, or drive only on weekends, a standard car insurance policy could mean paying a higher premium than necessary. That's because conventional policies primarily factor in your car's make, model and age, along with driver attributes such as age and credit score, rather than how much you actually drive.
Alternatives such as pay-as-you-drive (PAYD), or usage-based insurance, address this gap by allowing low-mileage drivers to pay based on the time they spend on the road. Here's everything you need to know.
How PAYD works
Under a PAYD policy, you choose a kilometre slab at the start of the policy year—typically ranging from 2,500 km to 10,000 km—based on your expected annual usage.
To check whether you're eligible, look at your odometer reading and divide it by the age of your car. This gives you the average annual distance driven. Generally, PAYD is most suitable if your yearly usage is below 10,000 km.
At the start of the policy, you share your car's current odometer reading with the insurer. For instance, if your odometer reads 20,000 km and you opt for a 5,000 km slab, your reading at renewal should not exceed 25,000 km.
Some advanced "pay how you drive" variants also use telematics devices or built-in systems to monitor driving behaviour.
Once you choose the kilometre slab and policy tenure—typically one year—the insurer calculates the premium by combining the IRDAI-prescribed third-party premium with the own-damage (OD) premium, which is split into a fixed component and a variable component linked to your chosen kilometre slab. In a standard comprehensive policy, the entire own-damage premium remains fixed irrespective of vehicle usage.
The discount on the variable component differs across insurers. HDFC Ergo caps savings at 25% of the own-damage premium, while Digit offers discounts of up to 90% for customers opting for the lowest kilometre slabs.
During the policy period, your cover remains valid as long as you stay within the selected kilometre limit and pay the applicable premium. At renewal, the insurer reviews the actual kilometres driven and may allow unused kilometres to be carried forward or offer a renewal discount if you remained within the limit and made fewer claims.
Exceeding usage
If you are likely to exceed your chosen kilometre slab, you may need to pay an additional premium. Whether the own-damage portion of a claim is honoured, however, depends on the policy's terms and conditions.
Many insurers offer grace limits or allow customers to upgrade their kilometre slab during the policy year.
Aakansha Jain Nahar, executive vice president, ILM Research explained that generally, if the chosen kilometre limit is exhausted, most PAYD policies require the customer to buy a top-up. "If they do not, Own Damage claims after the limit is exhausted may become inadmissible," she said, noting that in a few policies, instead of full denial, the claim may be settled on an under-insurance basis if the kilometre reading crosses the permitted limit plus the allowed margin.
For example, if the customer received a 10% premium discount for choosing a 10,000 km limit, and the vehicle has crossed 11,000 km at the time of claim, the claim amount may be reduced proportionately, such as being settled at 90% of the admissible liability.
Low adoption
Abhishek Bondia, co-founder, SecureNow believes that the adoption of these policies remains low in India primarily because of lack of awareness and the fact that motor insurance premiums are already heavily discounted, leaving limited scope for PAYD to deliver meaningful incremental benefits.
A hypothetical comparison on one website we looked at shows that a car owner choosing the 12,000 km slab pays ₹6,844 annually, compared to ₹7,409 for unlimited kilometres, a difference of just ₹565. But you cannot really choose your slab freely. The insurer determines your eligibility based on your car's actual odometer reading. A three-year-old car must not have exceeded 36,000 km in total to qualify for the 12,000 km slab.
If your odometer says otherwise, the lower slab simply isn't available to you. As Bondia points out, given that premiums are already heavily discounted through no claim bonus (NCB) and insurer competition, the incremental saving from PAYD may not be compelling enough for most car owners to bother.
He added that the value proposition is also uncertain because customers cannot easily predict whether their driving behaviour will translate into meaningful savings. However, he noted that this may be beneficial for someone who is not taking out the car at all or lives abroad. They generally only opt for a mandatory third-party cover to save on premiums. But on very low usage PAYD's discount on the own-damage component could make comprehensive cover affordable for this group, giving them protection they had given up on without paying the full standard rate.
Choose wisely
Nahar said buyers should begin by checking their actual usage through odometer readings, service records, or fuel and trip history. This helps them select a realistic kilometre slab instead of simply opting for the cheapest one.
Additionally, she said it is important to understand what happens if the selected kilometre limit is exceeded, including any adjustments or penalties that may apply.
According to her, the biggest mistake is choosing the lowest kilometre slab purely to save on premiums without realistically estimating annual usage. A person who opts for a 2,500 km slab but ends up driving 7,000 km may lose much of the benefit.
She added, "Another mistake is not checking how the insurer tracks usage."
PAYD may not be suitable for daily commuters, people who frequently undertake long-distance travel, or those whose driving patterns vary significantly from year to year.
On the other hand, if your annual car usage is low and reasonably predictable, it is worth checking your odometer, calculating your average usage, and comparing PAYD quotes across insurers before your next renewal. The savings could be more substantial than you expect.