Coinsurance, copay, out-of-pocket, deductibles — all these terms might feel like they mean the same thing, but they’re all distinct features of insurance. So, what is coinsurance? That’s the conundrum we’ve set out to resolve in this post.
We’ll discuss the ins and outs of coinsurance — what it is, how it works, and some common misconceptions. We’ll also talk about other terms people often find confusing, such as deductibles and copay.
So let’s begin with the fundamentals.
Coinsurance isn’t standard in car insurance — though it does come up now and again — you’ll find this feature more often in health or property policies.
In a nutshell, coinsurance is a part of insurance coverage that beneficiaries need to pay out of their pockets. The amount is percentage-based, so its size varies.
But what is a coinsurance percentage? Insurance beneficiaries usually get to choose from a few different options, the most common being 20/80. That means you pay 20% of the costs after an accident, and your insurer covers the remaining 80%. Some insurers offer 30/70, 10/90, or even 0/100 options.
So what is a coinsurance example? Imagine your car needs repairs that cost $10,000 (without the deductible). If your coinsurance is 20/80, you need to pay 20% of the bill — $2,000. Meanwhile, your insurer covers the remaining $8,000.
What Is Coinsurance Maximum?
A coinsurance maximum is a standard part of health insurance, and it usually resets annually. It is the fixed maximum amount that beneficiaries have to pay in a set period.
Let’s say you have a $5,000 annual coinsurance maximum, so, regardless of the coverage percentage on your policy, you won’t have to pay over that sum.
How Does Coinsurance Work?
Now that we’ve got a basic idea of coinsurance, we can dive into more detail.
When Do You Pay Coinsurance?
As a general rule, people pay their coinsurance once their deductibles are cleared.
Deductibles are also a portion of the coverage insurance beneficiaries have to pay. They aren’t the same as coinsurance, but they’re also an out-of-pocket expense.
Coinsurance after deductible is a standard insurance practice, so here’s how the typical payout is.
You get into a car crash, and you need to repair your car. Since you have insurance to cover the costs, you file a claim. All the documentation is in order, and your insurer accepts your claim. Usually, the company subtracts the deductible from the sum you receive.
Your coinsurance is the agreed-upon percentage of repair costs minus the deductible.
Who Pays Coinsurance?
Everyone who gets into an accident and relies on their insurer for compensation needs to pay coinsurance, assuming it’s a part of their policy.
There are a few exceptions:
- Waiver of coinsurance clause — available in some circumstances to remove any coinsurance obligations
- Agreed value coverage — a policy that lets you suspend your coinsurance clause for a period of time
- Value reporting — allows you to avoid coinsurance on a property during low-value seasons
What is 20% Coinsurance?
A 20% coinsurance — also known as 20/80 — means you cover 20% of claim expenses, and the insurer takes care of the other 80%. That split is the most common option offered by insurance companies, but not the only one — 10/90 and 30/70 are also popular.
While 20/80 is the typical coinsurance example, it might not be the best option for everyone. The ratio of the split impacts the premium’s affordability.
The general rule is that lower coinsurance comes with a higher premium since the insurer pays more. On the other hand, if you pay more for coinsurance, your final cost goes down.
For example, a 10/90 coinsurance clause will likely have a higher premium than a 30/70 split.
What Does 0% Coinsurance Mean?
When people have 0% coinsurance, they don’t have to pay anything after handling their deductibles. Instead, their insurer pays for all following expenses related to the accident.
That is very rare in car policies, and you’re much more likely to get 0% in health or property insurance.
What Does 100% Coinsurance Mean?
A 100% coinsurance is essentially the opposite of the 0% clause. In other words — you pay for all expenses after an accident. On the other hand, your premium costs significantly less.
If you’re an excellent driver in a safe area, that might prove an enticing option for you. People with chronic health issues, however, might want to avoid this one in their health insurance.
What Is the Purpose of Coinsurance Provisions?
So far, we defined coinsurance and elaborated on how it works. We also took a look at a few examples of coinsurance clauses, as well as how they impact your premium.
So, what is coinsurance for? It serves to share the risk of any damages or injuries with the insurer. Another purpose is to ensure that customers don’t insure their property below its actual value — that’s why it’s percentage-based.
Imagine you have a $100,000 home repair coverage plan with a 20/80 coinsurance split. That’s despite experts’ determining the replacement cost for the property is $200,000.
But what is a coinsurance clause going to do to affect that?
Let’s say that a fire breaks out and destroys the house. Repairing it completely would cost $200,000, but you only have coverage up to half that sum.
As per your 20/80 coinsurance, your provider covers 80% of your $100,000 coverage, i.e., $80,000. Therefore, you end up paying $120,000 (without the deductible) of the $200,000 cost.
But had you taken the proper coverage, your insurer would have paid 80% of $200,000, which is $160,000. That means you’d have spent only $40,000, again, without the deductible.
Comparing Coinsurance to Other Clauses
What does coinsurance mean in regard to similar clauses? We’ve already mentioned deductibles, but they aren’t the only easy-to-confuse ones. We’ll go over every feature commonly found in liability policies and contrast it with coinsurance.
After this section, you will have no trouble telling these clauses from one another.
Coinsurance vs. Copay
Insurance benefactors mix up copay and coinsurance all the time. The names might be a little similar, but the clauses differ in a few key ways.
Much like coinsurance, a copay is a method of cost-sharing between insurance companies and their customers. So, what is the difference between copay and coinsurance?
Copays are set rates for various services that fall under your insurer’s remit. For example, after you reach your deductible, every time you buy prescription drugs, you pay a $5 copay, while your health insurer covers the remaining cost.
Being fixed, you’ll know how much you’ll spend on copay ahead of time. The same can’t be said for coinsurance, but it will never exceed the actual cost of service. On the other hand, you could be paying a $20 copay for a $15 drug.
Coinsurance vs. Deductible
Deductibles are accident-related expenses you pay yourself. You and your insurer agree on the deductible size when putting together your insurance plan.
For example, if you replace a ruined bumper worth $1,000 and have a $250 deductible, your insurer covers $750.
In car insurance, deductibles are a per-case expense, meaning they apply every time you file a claim. But in health insurance, deductibles are an annual amount you must spend before getting 100% coverage.
With deductibles explained, we can focus on: what does coinsurance after deductible mean?
When you’ve paid all your deductibles (in healthcare policies), the coinsurance is activated. Before that, you pay 100% of your medical expenses through deductibles.
Once you reach your deductible limit, your coinsurance begins to cover a portion of your bills.
A 0% coinsurance policy is an excellent example of this feature. Once you’ve hit your deductible limit, your insurer covers 100% of your relevant costs.
Coinsurance vs. Out-of-Pocket Maximum
Finally, let’s tackle the subject of out-of-pocket maximums.
Also known as an out-of-pocket limit, the term refers to the insurance expenses you need to pay before your provider steps in. More precisely, it includes deductibles, copay, and coinsurance.
The following expenses don’t go toward meeting your out-of-pocket maximum:
- Plan premiums
- Certain plan deductibles
- Services and care not covered by your insurer
- Many forms of preventive care (hor healthcare)
- Out-of-network services (for healthcare)
- Costs over the allowed amount
What Does Coinsurance Mean — Wrapup
Much like other liability policy features, coinsurance can be a tricky concept to understand. Hopefully, this guide managed to help with that. We covered everything you need to know about coinsurance in general and the differences with other confusing terms.
So, if you are still wondering, “what is coinsurance” — it’s a cost-sharing clause that splits incident-related expenses between the policyholder and the insurer. It’s an agreed-upon percentage of every service that falls within a given coverage.
We hope with this guide, you’ll get a solid enough grasp of coinsurance not to feel intimidated next time you set up an insurance plan.
People Also Ask
Coinsurance is a cost-sharing clause between the provider and the beneficiary. It makes the insured responsible for a percentage of the relevant expenses. On the other hand, a copay is a set amount paid by the policyholder for every covered service.
The copay is fixed instead of being a percentage of a particular expense (like coinsurance is). That means you pay the same amount every time you use a service.
Under the coinsurance clause, the beneficiary contributes a percentage of the relevant expenses like repairs or medical bills.
In contrast, deductibles are fixed expenses you need to pay before the insurer begins covering your bills. If you have a $500 deductible and need to spend $2,000 in car repair bills, your provider covers $1,500. You’re responsible for the remaining $500, i.e., the size of your deductible.
If you have 30% coinsurance, it means you pay 30% of any expenses eligible for an insurance claim. Meanwhile, the insurer takes care of the rest minus the deductible.
For example, you need to pay $7,000 for various bills and have a $1,000 deductible. You’re responsible for 30% of $6,000 — $1,800 — plus your $1,000 deductible. Your insurer covers the other $4,200.
Initially, coinsurance sounds like a bad thing to policy beneficiaries. After all, it’s more money out of their pockets. But looking further into it, it becomes clear that it exists to protect the insured.
Coinsurance prevents people from underinsuring their property because if they do, the portion of the costs covered by the insurer gets proportionally smaller.
So, what is coinsurance essentially? It’s an incentive to have people insure their assets to their total value.