UPDATED: Mar 13, 2020
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When two or more people share the risk of an insurance policy, it’s called coinsurance.
In some situations, the policyholder (you) and the insurance company agree to share the risk involved in a policy. Both parties assume a portion of the risk.
Coinsurance is more common in the health insurance world. The insured individual will agree to pay a portion of the claim, while the health insurance company will agree to cover the remainder of the claim. You might pay 20%, and your health insurance company pays 80%.
In the car insurance world, coinsurance policies are less common. With coinsurance car insurance policies, the policyholder would pay the deductible first, and then the insurer would pay out a percentage of the costs to cover the damages, while the insured party pays the rest.
Let’s say you get into an accident. Your vehicle requires $10,000 in car repairs. You pay your $1,000 deductible, and then you split the cost 50/50. You pay 50% of the remaining repair costs, while your insurance company pays the other 50%. You pay $4,500 (plus your deductible), while your insurer pays the other $4,500.
The coinsurance percentages covered by each party are defined in the insurance contract.
How Does Coinsurance Work?
Let’s say you have a $100,000 high-end SUV. You approach an insurance company to set up a coinsurance policy.
Under your coinsurance policy, your insurance company agrees to cover 80% of the value of the truck, while you agree to cover the remaining 20%.
If your truck is stolen and not recovered by the police, then the insurance company is required to pay compensation for your vehicle. You pay your $1,000 deductible, and then you split the remaining amount ($99,000) 80/20. You pay $19,800, while your insurer pays $79,200.
You would also split the cost of any damages you inflict on other people and property. If you hit another person and cause that person to incur $50,000 of medical bills, for example, then you and your insurance company would split this liability based on the coinsurance terms in your policy.
There Are Different Types of Coinsurance
In the United States, coinsurance policies are less common for car insurance and more common for health insurance.
Under a coinsurance health care policy, the insured individual will pay a share of the payment made against the claim. You might have an 80/20 coinsurance health care policy, for example, where you pay $20,000 for a $100,000 surgery and your health insurance company covers the remaining $80,000.
Outside of the United States, coinsurance is used in a different context. Typically, coinsurance refers to the idea that two or more insurance companies are sharing the risk of an insurance contract. Two insurance companies might agree to split the risk of a large liability, for example, to prevent that liability from severely impacting either company.