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What Does Coinsurance Mean?

Coinsurance is a term often used in the insurance industry and it can be confusing at times. That’s because it means different things for different types of policies. Two types of policies you’ll commonly find coinsurance on are health insurance and property insurance. Let’s look at both in more detail to explain what they mean and how they differ from each other.

Health Insurance

In health insurance terms, coinsurance is the amount you pay for services after your deductible has been met. It’s generally expressed in percentage terms, like 20%.

Say, for example, you have a health insurance policy with a $1,500 annual deductible and 20% coinsurance. In this case, you’re responsible for the first $1,500 of health care expenses for the year (deductible) and 20% of the costs that exceed the deductible (coinsurance).

Health Insurance Coinsurance Example

Imagine you have a policy like the one described above ($1,500 deductible, 20% coinsurance) and you have an accident which requires emergency medical care. The total bill comes out to $10,000. For purposes of the example, let’s assume you haven’t made any other claims on your health insurance policy this year.

Since your deductible has not yet been met for the year, you’re responsible for 100% of the first $1,500 and 20% of the remaining $8,500. Your insurance company will cover the 80% that’s left.

20% Health Coinsurance Example ($1,500 Deductible)
 Your CostsInsurance Covered Costs
First $1,500 of Costs$1,500 (Deductible)$0
Remaining $8,500$1,700 (20% Coinsurance)$6,800
Total Cost$3,200$6,800

Property Insurance

In property insurance, coinsurance works a little differently. If you have an 80% coinsurance clause, it doesn’t mean that you’ll be responsible for 80% or even 20% of damages. It means that your property needs to be insured for at least 80% of the actual replacement cost, or you will be subject to a reduced payout. This helps insurance companies charge premiums that accurately reflect the risk.

Property Insurance Coinsurance Example

Imagine you own a large warehouse and you’re insuring it on a policy with an 80% coinsurance clause. The estimated replacement cost of the warehouse is $1,000,000. You experience a fire, which causes $500,000 in damage.

80% Property Coinsurance Example ($5,000 Deductible)
 Scenario 1Scenario 2
Replacement Value of Building$1,000,000$1,000,000
Coinsurance Requirement$800,000 (1,000,000 * 80%)$800,000 (1,000,000 * 80%)
Property Insured Amount$800,000$750,000
Meets Coinsurance Clause?YesNo
Loss Amount$500,000$500,000
Coinsurance AdjustmentNone.9375 (750,000/800,000)
Adjusted Recoverable Loss$500,000$468,750 (500,000*.9375)
Deductible$5,000$5,000
Amount Paid$495,000 (500,000 – 5,000)$463,750 (468,750 – 5,000)

As you can see, property coinsurance doesn’t necessarily mean you’ll be subject to a certain percentage of the loss. It does mean you should always work with a trusted insurance professional and keep your coverage up to date. Not doing so can be costly!

If you have any questions about your property or health insurance, contact us.