Definition§
Coinsurance in the context of insurance is a principle where the insurer and the insured share the covered losses in a specified ratio. More specifically, the insured is required to maintain insurance coverage up to a certain percentage of the property’s value. Failure to do so results in the insured bearing a proportional part of the loss. This element is often included in health, property, and other forms of insurance to ensure policyholders insulate themselves against significant financial losses.
Examples§
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Property Insurance: A property worth $200,000 has a coinsurance requirement of 80%. If the property owner insures the property for $160,000 (80% of $200,000) and incurs a loss of $50,000, the insurance company would cover the loss according to the policy terms without penalty. However, if the property is insured for only $100,000, any claim would be penalized for underinsurance.
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Health Insurance: An insurance plan might have an 80/20 coinsurance clause where the insurer pays 80% of the medical expenses after the deductible is met, and the insured pays the remaining 20%.
Frequently Asked Questions (FAQs)§
What is the purpose of coinsurance?§
Coinsurance encourages policyholders to purchase insurance coverage close to the actual value of their property, thereby reducing the risk to the insurer and ensuring that policyholders are adequately protected against substantial losses.
What happens if I don’t meet the coinsurance requirement?§
If you do not meet the coinsurance requirement, you will be penalized when a loss occurs. Essentially, you will cover a higher proportion of the loss out of pocket, according to the coinsurance formula.
How is the coinsurance penalty calculated?§
The penalty is calculated based on the proportion by which the insured amount falls short of the required coinsurance amount. For instance, if you are required to insure 80% of your property’s value but only insure 50%, your payout will be reduced correspondingly in the event of a claim.
Can coinsurance apply to other types of insurance besides property?§
Yes, coinsurance is also commonly found in health insurance policies, where it determines the split of costs between the insurer and the insured after the deductible is met.
Is coinsurance the same as a deductible?§
No, a deductible is a specific amount that the insured must pay out of pocket before the insurance company starts paying, while coinsurance is a percentage split of costs that continues after the deductible has been met.
Related Terms§
- Deductible: A predetermined amount that the insured must pay before the insurance coverage kicks in.
- Premium: The payment made to the insurance company, typically on a regular basis, to keep the insurance policy active.
- Copayment (Copay): A fixed fee that the insured must pay when receiving a specific service or medication.
- Policy Limit: The maximum amount an insurer will pay for a covered loss.
Online References§
- Investopedia: Coinsurance
- The Council of Insurance Agents & Brokers
- NerdWallet: Coinsurance in Health Insurance
Suggested Books for Further Studies§
- “Insurance Law and Practice” by John F. Dobbyn
- “Healthcare Insurance and Reimbursement Methodologies” by Michelle Green
- “Principles of Risk Management and Insurance” by George E. Rejda and Michael McNamara
- “Property and Casualty Insurance Concepts Simplified: The Ultimate ‘How to’ Insurance Guide for Agents, Brokers, Underwriters and Adjusters” by Christopher J. Boggs
Fundamentals of Coinsurance: Insurance Basics Quiz§
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