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Definition of Coinsurance

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Insurance contracts often include a deductible clause requiring the insured to pay a minimum amount before cost-sharing begins. After meeting the deductible requirement, the insurer only covers their agreed-upon share of the expenses. When a claim arises, the insured must pay their portion of the costs before the insurer contributes.

Insurance policies typically define an out-of-pocket maximum, which sets an upper limit on the amount an insured person must pay for medical expenses within a given year. Once this maximum threshold is reached, the insured can no longer make further payments. The combined impact of coinsurance and deductibles determines the out-of-pocket expenses.

How Does It Work?

Insurance contracts often have a predetermined percentage for sharing claim costs between the insurer and the insured. A commonly used ratio is 80:20 for coinsurance. Additionally, there is a requirement that the insured individual must pay a deductible during the insurance year before any cost-sharing occurs. The insurer and the insured divide the claim cost after subtracting the deductible amount according to the agreed ratio. Insurance companies establish a maximum limit for coinsurance and deductibles or maximum out-of-pocket expenses, wherein the insured person is not obligated to bear these expenses.

In property insurance contracts, the term coinsurance refers to the minimum level of insurance coverage that a property owner must have to be eligible for claims.

Liability of Insured = (Cost of Claim – Deductible) × Coinsurance Percentage Share of Insured + Deductible

Liability of Insurer = Cost of Claim – Liability of Insured

If you look at the formula, you can identify that the formula requires the insured to meet the deductible cost. The insured and the insurer divide the remaining portion of the claim in the agreed ratio.

Examples of Coinsurance

Consider an example wherein a health insurance contract provides coinsurance in the ratio of 80/20. The insurance company has set the deductible at $1,000 and determined the out-of-pocket maximum to be $6,000. Suppose the insured needs to cover medical costs of $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

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

If the insured achieves the out-of-pocket maximum in the early phase of the year, then the insurer bears the entire cost of the claim.

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.

The high out-of-pocket maximum increases the overall costs for the insured, even if the premium cost is less.

The cost of fulfilling the policy is high for the insurer in patients requiring a higher level of medical attention.

Conclusion

Insurers include a coinsurance clause in almost all kinds of insurance contracts to actively share the burden of insurance claims and actively protect insured persons from sudden medical emergencies.