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 particular 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 the 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 an insured must incur during the year before the insurance company begins to incur its share of expenses. Only once the required deductible amount is met the insurer shall start paying its share of costs per the agreed coinsurance ratio. Further, when the claim arises, the insured must pay their share of the prices before the insurer pays them.
However, in many medical insurance policies, there is an upper cap on out-of-pocket expenses, known as the 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 prevalent 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.
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 deductible cost. 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 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 surgery, and the insured hasn’t incurred any medical costs 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 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, specific plans provide 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 a 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 premium cost 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 patients requiring a higher level of medical attention.
Conclusion
A coinsurance clause can be found in almost all kinds of insurance contracts. The exact help the insurers share the burden of insurance claims, and insured persons also say protected from sudden medical emergencies.
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