What Is the Coinsurance Formula?
The coinsurance formula is thehomeowner's insurance formula that determines the amount of reimbursem*nt that a homeowner will receive from a claim. The coinsurance formula becomes effective when a homeowner fails to maintain coverage of at least 80%of the home's replacement value. Those who are in this situation who file a claim will only receive partial reimbursem*nt according to the formula.
Key Takeaways:
- The coinsurance formula determines the amount of reimbursem*nt that a homeowner or property owner will receive from a claim.
- The coinsurance formula is applied when a property owner fails to maintain coverage of at least 80%of the home's replacement value.
- If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk.
- In this case, the owner becomesa "co-insurer"and will share any loss with the insurance company according to the coinsurance formula.
How the Coinsurance Formula Works
The coinsurance formula is relatively simple. Begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursem*nt.If this reimbursem*nt value is greater than the specified limits of a single insurance company, a secondary coinsurer will supply the remaining funds.
Coinsurance is a clause used in insurance contracts by insurance companies on property insurance policiessuch as buildings. This clause ensurespolicyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. Coinsurance is usually expressed as a percentage. Most coinsuranceclauses require policyholders to insure to 80, 90, or 100%of a property's actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90%must be insured for no less than $900,000. The same building with an 80%coinsurance clause must be insured for no less than $800,000.
If a property ownerinsures a property for less than the amountrequired by the coinsurance clause, they becomea "co-insurer"and will share the loss with the insurance company.
Real-World Use of the Coinsurance Formula
If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk. Thus, they becomea "co-insurer"and will share the loss with the insurance company according to the coinsurance formula.
Here are two examples that demonstrate how the coinsuranceclause works:
Building Value $1,000,000
Coinsurance Requirement 90%
Required Amount of Insurance $900,000
Actual Amount of Insurance $600,000
Amount of Loss $300,000
The coinsurance formula is:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
Inserting the amounts above in the formula produces the following calculation:
($600,000)X$300,000=$200,000
($900,000)
So, in this situation, the owner absorbs a $100,000 coinsurance penalty since they retained one-third of the riskrather than transfer it to the insurer. Therefore, the ownerabsorbs one-third of the loss.If the building had been insured to the amount required by thecoinsurance clause (in this case, 90%),the coinsurance calculation would look like this:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
($900,000)X$300,000=$300,000
($900,000)
In the second example, since the owner met the coinsurance requirement, they are not a co-insurer, and the claim is paid without penalty.
Coinsurance clauses are also found in business interruption policies. These clauses ensure that policyholders insure their revenue stream to an appropriate value.
FAQs
Coinsurance Concept
What is coinsurance with example? ›
Coinsurance is an insured individual's share of the costs of a covered expense (it usually applies to health-care insurance). It is expressed as a percentage. If you have a "30% coinsurance" policy, it means that, when you have a medical bill, you are responsible for 30% of it.
What is coinsurance in home insurance? ›
The coinsurance clause of your homeowners policy requires you to carry coverage of at least 80 percent of your home's total value if you want to receive full replacement cost for any losses—partial or full—you suffer.
How is coinsurance calculated? ›
Example of coinsurance with high medical costs
Allowable costs are $12,000. You'd pay all of the first $3,000 (your deductible). You'll pay 20% of the remaining $9,000, or $1,800 (your coinsurance). So your total out-of-pocket costs would be $4,800 — your $3,000 deductible plus your $1,800 coinsurance.
What is an example of 100 coinsurance? ›
For example, let's say you have a property valued at $100,000 and your coinsurance clause requires 100 percent coverage. This means your coverage limit cannot be less than 100 percent of $100,000 – that is, it must be $100,000.
What is an example of coinsurance formula? ›
Coinsurance Concept
For example, covered expenses above the deductible may be shared 80 percent insurer/20 percent insured until a policy-stated total is reached. If the total was $2,500, then the insurer would assume $2,000 (80 percent of $2,500), while the insured's portion would be $500 (20 percent of $2,500).
What is the best way to explain coinsurance? ›
Coinsurance is a property insurance provision that imposes a penalty on an insured's loss recovery if the limit of insurance purchased is not at least equal to a specified percentage of the value of the insured building or business personal property.
What is a good coinsurance percentage? ›
Coinsurance Based on Plan Tiers for ACA
A bronze plan is expected to cover approximately 60% of your health expenses. A silver plan should cover approximately 70% of your plan's expenses. A gold plan should be responsible for covering approximately 80% of your health expenses.
Is coinsurance always after deductible? ›
Coinsurance is the percentage of costs you pay after you've met your deductible. A deductible is the set amount you pay for medical services and prescriptions before your coinsurance kicks in fully. After you have spent the out-of-pocket maximum, your healthcare plan should cover 100% of eligible expenses.
Does coinsurance apply to actual cash value? ›
If the insured purchases insurance at least equal to the coinsurance percentage (say 80 percent), the insurer pays the full value of any loss (either replacement cost or actual cash value, depending on what the insured has purchased), less the deductible, up to the limit of insurance.
The 80% rule means that an insurance company will pay the replacement cost of damage to a home as long as the owner has purchased coverage equal to at least 80% of the home's total replacement value.
What is 20% of my coinsurance? ›
A 20% coinsurance means your insurance company will pay for 80% of the total cost of the service, and you are responsible for paying the remaining 20%. Coinsurance can apply to office visits, special procedures, and medications.
Why is my coinsurance 100%? ›
What does 100% coinsurance mean? Having 100% coinsurance means you pay for all of the costs — even after reaching any plan deductible. You would have to pick up all of the medical costs until you reach your plan's annual out-of-pocket maximum.
What is an example of 80 20 coinsurance? ›
Some common coinsurance examples include: 100%, 80/20, 90/10 and 50/50 – so if you have 80/20 coinsurance on your insurance plan, it means that the insurance company will cover 80% of your medical cost and you are responsible for paying the other 20% yourself. A deductible is commonly use together with coinsurance.
Is 0 coinsurance good or bad? ›
It's great to have 0% coinsurance. This means that your insurance company will pay for the entire cost of the visit or session. But often, you first have to meet your deductible in order for the coinsurance to kick in. Read on below to find out more about deductibles.
Is 90% a coinsurance? ›
Coinsurance is usually expressed as a percentage. Most coinsurance clauses require policyholders to insure 80, 90, or 100% of a property's actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90% must be insured for no less than $900,000.
Is coinsurance what I pay or they pay? ›
What is coinsurance? Coinsurance is a portion of the medical cost you pay after your deductible has been met. Coinsurance is a way of saying that you and your insurance carrier each pay a share of eligible costs that add up to 100 percent. The higher your coinsurance percentage, the higher your share of the cost is.
What's better, coinsurance or copay? ›
Copays are generally less expensive than coinsurance, so coinsurance will comprise much more of your out-of-pocket costs than copays. For instance, a primary care visit may cost you $25 for a copay, while that visit may cost you hundreds or thousands in coinsurance for tests and services.
What does 20% coinsurance mean? ›
What does 20% coinsurance mean? A 20% coinsurance means your insurance company will pay for 80% of the total cost of the service, and you are responsible for paying the remaining 20%. Coinsurance can apply to office visits, special procedures, and medications.
What is the primary purpose of coinsurance? ›
The purpose of coinsurance is to have equity in ratings. If your insured meets the coinsurance requirement, the insured receives a rate discount. The coinsurance clause helps to ensure equity among all policyholders.
