Definition of Coinsurance
In terms of the insurance market, coinsurance refers to the sharing of risks involved in an insurance contract between the insurer and the insured in such a way that the insured person is required to bear a certain portion of the claim, which is usually expressed as a percentage of the claims, in addition to the deductible payable by the insured of an amount agreed in advance.
When the clause of coinsurance exists, it requires an insured person to bear the costs of claim to a certain extent, which is expressed as a percentage of the total costs. The decided percentage is to be borne by the insured and the rest has to be borne by the insurer.
Sometimes, the insurance contracts also contain a clause for deductibles to be paid by the insured before any sharing of costs is done. Deductibles refer to the minimum amount that an insured must incur during the year before the insurance company begins to start incurring its share of expenses. Only once the required amount of deductible is met, the insurer shall start paying its share of costs as per the agreed coinsurance ratio. Further, when the claim arises, the insured must pay their share of the costs, before the costs are paid by the insurer.
However, in many medical insurance policies, there is an upper cap on out-of-pocket expenses, known as out-of-pocket maximum beyond which the insured doesn’t need to pay any amount towards the medical expenses in a year. Coinsurance and deductible together represent out-of-pocket expenses.
How Does It Work?
In many insurance contracts, there is an agreed percentage of sharing of insurance claim costs between the insurer and the insured. A very common ratio is 80:20 for coinsurance. Further, there is a condition that the insured person shall bear the deductible during the insurance year before any sharing of costs is done. Insurance companies might place an upper-cap for the coinsurance and deductible (known as maximum out-of-pocket expenses) beyond which the insured person might need not incur these expenses. The cost of the claim as reduced by the deductible amount is to be shared by the insurer and the insured in the agreed ratio.
In the case of property insurance contracts, the term coinsurance refers to the level of insurance cover that a property owner must take on the property to be eligible for claims.
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Formula for Coinsurance
The coinsurance amount to be incurred by the insured and the insurer can be calculated as follows:
If you look at the formula, you can identify that the formula requires the insured to meet the cost of the deductible, and then the remaining portion of the claim is divided between the insured and the insurer in the agreed ratio.
Examples of Coinsurance
Consider an example wherein a health insurance contract provides for coinsurance in the ratio of 80/20. Further, the deductible is $1,000 and the out-of-pocket maximum is decided at $6,000. Suppose the insured needs to cover medical costs amounting to $5,000 on a surgery and the insured hasn’t incurred any medical cost yet.
In this case, the amount to be borne by the insurer and the insured is calculated below:
Liability of Insured = (cost of Claim – Deductible) × Coinsurance Percentage Share of Insured + Deductible
- Liability of Insured = ($5,000 – $1,000) × 20% + $1,000
- Liability of Insured = $1,800
Also,
Liability of Insurer = Cost of Claim – Liability of Insured
- Liability of Insurer = $5,000 – $1,800
- Liability of Insured = $3,200
How to Lower Coinsurance Rates
Coinsurance rates can be reduced by availing of cost-sharing reduction subsidies. These subsidies allow the insured persons to enjoy lower coinsurance rates if they fulfill the criteria for premium tax credit and if their income falls between 100% to 250% of the Federal Poverty Level. Further, there are certain plans that provide for 0% coinsurance rates once the deductible is reached.
Advantages
Some of the advantages are given below:
- If the out-of-pocket maximum is achieved by the insured in the early phase of the year, then the entire cost of the claim is borne by the insurer.
- Insurance companies offer lower premiums with high deductibles and out-of-pocket maximums. This is beneficial for those who are at their young age.
- For insurance companies, this is a great way to pass on the burden of the insurance claim.
Disadvantages
Some of the disadvantages are given below:
- Even if the cost of premium is less, the high out-of-pocket maximum increases the overall costs for the insured.
- The cost of fulfilling the policy is high for the insurer in the case of patients that require a higher level of medical attention.
Conclusion
A coinsurance clause can be found in almost all kinds of insurance contracts. The same help the insurers to share the burden of insurance claims and insured persons also say protected from sudden medical emergencies that may arise.
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