Co-insurance – How Underinsurance Reduces Claim Payments
A situation in which you share the cost of your insurance with your insurance company after meeting your deductible. This concept is fundamental to understand when considering your healthcare or property insurance policy.
Imagine filing a significant insurance claim, expecting your expenses to be covered. Then you find out your payment has drastically reduced due to a co-insurance clause in your policy. This type of scenario happens more frequently than you might think.
TL;DR
- Co-insurance is a percentage of your healthcare cost that you pay after meeting your deductible.
- Fundamental in everyday agency work to recognize potential claim payment reductions due to underinsurance.
- A common misunderstanding is that co-insurance and copays are the same thing.
- A quick win for agencies is fully explaining this to clients so they can make informed policy decisions.
What Is Co-Insurance in Insurance?
For a client, co-insurance is the part of your bill, usually specified as a percentage, that you must pay for your healthcare or property repairs after you’ve met your deductible.
In insurance terms, it’s a clause in a policy that requires the policyholder to carry insurance equal to a specified percentage of the actual cash value (ACV) or replacement cost of the property insured. It applies mostly in health and property insurance.
Key Related Terms to Know
- Deductible – the amount you have to pay for covered services before your health insurance company starts to pay.
- Copays – a fixed dollar amount you pay for a specific service, like a doctor’s visit or prescription.
- Life Insurance Company – a type of insurance company that provides coverage in the event of the insured’s death.
- 20% Co-insurance – means that once your deductible has been met, the plan pays 80% of your medical costs and you’re responsible for the remaining 20%.
Common Questions about Co-Insurance
What is an example of co-insurance?
If a person with a health insurance policy that includes a $1000 deductible and a 20% co-insurance clause receives a hospital bill for $5000, they would first pay their $1000 deductible. Then, they would cover 20% of the remaining $4000, which equates to $800. Across these two elements – the deductible and the co-insurance – they would pay a total of $1800 out of pocket, and the insurance company takes care of the remaining $3200.
How does a co-insurance clause affect my property claim payment?
If you have an 80% co-insurance clause in your property insurance policy and your building is worth $200,000, you must insure at least $160,000 of this value. If you insured only $120,000 and you have a $50,000 loss, the co-insurance penalty is invoked. You’ll receive less than the full amount of the loss, as you didn’t meet the minimum requirement for insurance.
Co-Insurance Vs. Copays
Though they sound similar, co-insurance and copays are different; they are both types of cost sharing, but they function differently.
Comparison Area | Co-Insurance | Copay
|
Primary Use Case | After meeting your deductible, you pay a percent of the remaining cost. | You pay a fixed amount for a specific service. |
Coverage / Concept Type | Cost-sharing method | Payment Method |
Typical Exclusions | Non-covered services | Premium, deductible, co-insurance |
Who Is Most Affected By Errors | Those with costly or frequent treatments | Those with sporadic, small healthcare costs |
Common Mistakes | Not understanding the policy might lead to increased out-of-pocket costs | Confusing it with coinsurance or ordinary costs |
Real Claim Examples Involving Co-Insurance
Scenario 1: A client had a policy with a $100 deductible and 20% co-insurance and needed an MRI which cost $2000. After the $100 deductible, they had to pay 20% of the remaining $1900. So, their out-of-pocket cost was $480.
Scenario 2: A business owner insured his shop for $500,000. A fire caused damage worth $100,000, but the actual replacement cost was $1,000,000. The co-insurance clause required that 80% of the value be insured ($800,000). The owner’s insurance fell short by $300,000. The coinsurance penalty reduced his claim payment by 37.5% to just $62,500.
Scenario 3: A patient with a policy that included a 30% co-insurance clause had an outpatient surgery costing $3,000. After meeting their deductible, the patient’s co-insurance responsibility was $900.
Limitations and Common Mistakes
- Co-insurance doesn’t apply until after the deductible has been met.
- Co-insurance is often confused with copay, leading to underestimating out-of-pocket costs.
- Not understanding a co-insurance clause in a property insurance policy can lead to drastically reduced claim payments due to the co-insurance penalty.
How to Explain Co-Insurance to Clients
To a Personal Lines client: “Co-insurance is like splitting the bill with the insurance company. Once you’ve met your deductible, you’ll share the remaining costs based on a specific percentage.”
To a Small Business owner: “Co-insurance is when you must insure a certain percentage of the value of your property. Otherwise, your claim payout may be less than you expect.”
To a CFO or Risk Manager: “Co-insurance is an important aspect of your company’s risk management strategy. Ensuring your coverage meets the co-insurance percentage can prevent unexpected reduced payouts for claims.”