A Simple Way to Define Coinsurance
Coinsurance is an overlooked concept when purchasing and maintaining health and property insurance.
Being in the industry, I have met many home and business owners who were very under insured.
One medium to large loss on their current policy could cause extreme financial hardship.
Before reading, understand that insurance laws are different between states.
Exact wording and grammar may vary from state to state.
The purpose of this article is to explain the concept of coinsurance and persuade you to double-check your current policies.
Define Coinsurance Coinsurance is a risk sharing strategy between you and your insurance company.
The theory is that by the insured having to share the risk with the insurer, the insured will not abuse the coverage.
Most health insurance policies contain an 80/20 coinsurance clause.
This clause stipulates that the insurer will pay 80% of the expenses above the deductible, while you pay 20% up to a certain limit.
Your limit is known as the stop-loss or maximum out-of-pocket.
Once you reach the stop-loss limit your insurer pays 100%.
It's easiest to look at an example - you break your leg while playing football.
Your total bills for the injury are $10,000.
Your current health policy has a $500 deductible, an 80/20 clause, and a stop-loss limit of $2,000.
How much will you pay and how much will the insurance company pay? First, there is your deductible.
You're responsible to pay up your deductible, which is $500.
For the remaining $9,500, you're responsible for 20% or $1,900.
Therefore, the total you pay on a $10,000 bill would be $2,400.
Coinsurance and Property Insurance Coinsurance works differently in property compared to health.
However, the concept of risk sharing is the same.
Your policy on your home, when purchased, should equal the replacement cost of your home.
You must carry at least 80% of the replacement cost at the time of loss.
The confusing part about home coinsurance is replacement cost is difficult to predict.
In the case of a total loss, you don't have to rebuild the land, just the house.
Therefore, you need coverage for the current cost of building materials and labor, not how much the house is worth on the market.
The concept of replacement cost is cause for many not having adequate coverage.
Most don't maintain their policy to an exact replacement cost.
If the price of building materials and labor rises, so should the amount you carry on your homeowners policy.
Below is an example of how property coinsurance works: Your current house replacement cost is $200,000.
Five years ago you purchased $140,000 of insurance with a coinsurance requirement of 80% and a $1,000 deductible.
A tornado goes through your home causing $100,000 in damage.
How much will your insurance company pay? Coinsurance Formula = (insurance purchased/coinsurance) x loss Amount covered = (($140,000/(80% x $200,000)) x $100,000 Amount Covered = $87,500
Being in the industry, I have met many home and business owners who were very under insured.
One medium to large loss on their current policy could cause extreme financial hardship.
Before reading, understand that insurance laws are different between states.
Exact wording and grammar may vary from state to state.
The purpose of this article is to explain the concept of coinsurance and persuade you to double-check your current policies.
Define Coinsurance Coinsurance is a risk sharing strategy between you and your insurance company.
The theory is that by the insured having to share the risk with the insurer, the insured will not abuse the coverage.
Most health insurance policies contain an 80/20 coinsurance clause.
This clause stipulates that the insurer will pay 80% of the expenses above the deductible, while you pay 20% up to a certain limit.
Your limit is known as the stop-loss or maximum out-of-pocket.
Once you reach the stop-loss limit your insurer pays 100%.
It's easiest to look at an example - you break your leg while playing football.
Your total bills for the injury are $10,000.
Your current health policy has a $500 deductible, an 80/20 clause, and a stop-loss limit of $2,000.
How much will you pay and how much will the insurance company pay? First, there is your deductible.
You're responsible to pay up your deductible, which is $500.
For the remaining $9,500, you're responsible for 20% or $1,900.
Therefore, the total you pay on a $10,000 bill would be $2,400.
Coinsurance and Property Insurance Coinsurance works differently in property compared to health.
However, the concept of risk sharing is the same.
Your policy on your home, when purchased, should equal the replacement cost of your home.
You must carry at least 80% of the replacement cost at the time of loss.
The confusing part about home coinsurance is replacement cost is difficult to predict.
In the case of a total loss, you don't have to rebuild the land, just the house.
Therefore, you need coverage for the current cost of building materials and labor, not how much the house is worth on the market.
The concept of replacement cost is cause for many not having adequate coverage.
Most don't maintain their policy to an exact replacement cost.
If the price of building materials and labor rises, so should the amount you carry on your homeowners policy.
Below is an example of how property coinsurance works: Your current house replacement cost is $200,000.
Five years ago you purchased $140,000 of insurance with a coinsurance requirement of 80% and a $1,000 deductible.
A tornado goes through your home causing $100,000 in damage.
How much will your insurance company pay? Coinsurance Formula = (insurance purchased/coinsurance) x loss Amount covered = (($140,000/(80% x $200,000)) x $100,000 Amount Covered = $87,500
- Note: If you would have adjusted your insurance coverage to $160,000, 100% of the loss would have been covered.
