All You Need to Know About Co-Insurance

Most people have different types of insurance; one for their house, another for their car, and for their health. The main purpose of these insurances is to provide policyholders with financial protection or reimbursements against losses and damages that resulted from an unfortunate event. Obtaining these insurances may be costly, but they help ease individuals’ financial hardships by covering all expenses that may arise from an accident. 

In general, almost every insurance plan consists of provisions, with co-insurance being one of the most common. This is a clause included in most insurance policies covering properties, contents, stock, or industrial equipment which ensures that policyholders insure their assets to a certain amount and receive a fair premium for the policy. 

However, those who are new to this term may ask the questions, what is co-insurance and how does co-insurance work in various insurance policies? 

To help you understand better, we have written the ultimate guide elaborating on everything you need to know about this clause and its uses.

What is co-insurance?

By definition, co-insurance is an agreement you make with your insurance company to share the cost of a claim. As a policyholder, you are required to set a certain amount to cover a percentage of your property value, or another asset in order to receive full compensation in case of a loss or damage. 

In general, co-insurance is included in many policies, including health, homeowners, commercial, and property insurance, where it serves a different purpose in each.

For example, in property insurance, the main purpose of co-insurance is to discourage policyholders from underinsuring their properties. Because most property damages don’t always result in a total loss, many business owners intentionally decide to underinsure their property to save on premiums. 

In healthcare, co-insurance refers to the amount you and your insurance company pay for all medical expenses covered by your health insurance plan.

How does co-insurance work?

To better understand how coinsurance works, it is best to look at an example. Let’s say you own a building with an estimated replacement cost value of $100,000 and an 80% co-insurance factor included in your property insurance policy. You will only have to insure your asset for $80,000 in order to avoid a penalty and receive a fair premium for the risk. 

Now, imagine your property catches on fire and causes $60,000 worth of damage. After the incident, you submit a claim and the insurance company later determines that the replacement cost of the property is actually $150,000.

To determine this value, the insurance company uses the co-insurance formula, which works by dividing the amount of coverage on the building by the amount that should have been carried. Then, this number is multiplied by the amount of the loss, giving you the amount of the reimbursement. If the reimbursement is greater than the amount you have set on your insurance policy, a secondary co-insurer will cover the remaining funds. 

Common co-insurance percentages

In general, the stated percentage in co-insurance is usually 80%, 90%, and 100% of the value of your property, content, or stock, and each is used for different purposes.

For example, 80% is typically used for properties, stock in trade, and in healthcare; 90% is mainly used for buildings, contents, and industrial equipment; and 100% is used for profit business interruption.

Co-pay vs. co-insurance

In addition to containing co-insurance, some policies also consist of another provision called co-pay which is completely different from its cost-sharing counterpart.

As already mentioned, co-insurance is the agreement between the policyholder and the insurance company, which includes the amount of coverage the insurer should have based on the stated percentage. When the insurer reaches the annual deductible, they will have to pay the co-insurance at the agreed-upon rate.

On the other hand, a co-pay is the flat fee the policyholder needs to pay when they have a property or medical claim. In this case, the insurer doesn’t have to reach their annual deductible so the co-pay would apply.

Final thoughts

Insurance policies can be very complex, especially when they include provisions that policyholders need to be aware of. Co-insurance is one such provision that can be quite beneficial for insurers in case their property, health, or other personal asset suffers a loss or damage of any kind.

For more information, refer to our post and learn everything you need to know about co-insurance and its various uses.