According to stats from Nationwide Insurance, about two out of three homes is underinsured. Most, if not all, of those underinsured homes have a coinsurance clause in the homeowners insurance policy that can cost the homeowner big money if there’s a claim.
Coinsurance means that you pay a percentage of the claim.
This might sound similar to co-payments, used in health insurance, or deductibles, used in nearly all types of insurance, but coinsurance has a very specific trigger in property insurance, like a home insurance policy.
To add further confusion to an already confusing term, coinsurance in property insurance and coinsurance in health insurance each have a different effect on how much of your claim is paid because of how the deductible is applied.
Let’s try to untangle the coinsurance confusion. Here’s how it works.
How it works: Coinsurance and home insurance
Because coinsurance has a different math effect for health insurance vs. home insurance, let’s work with property insurance first.
For example, if you insured your average home for $300,000, it’s a common assumption that your insurer will pay to rebuild your home if it burned down. Accidental fire is a covered claim on a homeowners insurance policy, so the claim will be covered. All that remains in question is the percentage of the claim that will be covered — and what if only part of the home is damaged?
If your house was insured for $300,000 but the insurer finds that it would cost $400,000 to rebuild your home, then your house was insured for 75 percent of its rebuild cost.
Say, “Hello!” to coinsurance.
Most home insurance policies have a clause that states that the home must be insured to 80 percent of the rebuild cost to be considered fully insured – and that any claims would be subject to coinsurance if the home is insured for less than 80 percent of the rebuild cost.
Your insurer isn’t too interested in how much you paid for your house or its current market value. Home insurance is designed to rebuild your house and that’s the value insurers are considering when determining if coinsurance applies.
In the example above, where the $400,000 house is only insured for $300,000, the insurer will not pay the $400,000 you need to rebuild. They will only pay $300,000. Then they’ll subtract your deductible, possibly thousands of dollars, leaving you with less than 75 percent of the money you’ll need to rebuild the house — and a bank card that’s warm to the touch.
Coinsurance applies to any covered claim for your house if you are insured below the threshold of 80 percent. Using our example home, a smaller claim for $10,000 will only pay $7,500 — and then your deductible is subtracted from the claim payout, possibly leaving you with only half the money you’ll need to repair your home.
|Rebuild Cost||Insured Value||Insurance to Value Percentage||Claim Amount||Claim Payment|
In all of these examples, the deductible will still be applied. A $7,500 claim settlement might only be $5,000 after the deductible is subtracted from your claim payment.
If your home is insured to 80 percent of the rebuild cost, or $320,000 using the above example, the coinsurance penalty would not apply to covered claims of any size. However, the insurer would not pay more than $320,000 and the deductible would still be subtracted from the claim payment.
For property insurance, the deductible applies for each occurrence (claim) and is subtracted from the claim payment at the end of the math equation. This differs from health insurance, discussed next, wherein the deductible is a total amount per policy period which is paid first (by you) before any claims are covered.
Coinsurance for property applies to much more than homes. All types of insured property can be affected by coinsurance — as well as business insurance policies — and the coinsurance coverage requirement can be as high as 100 percent, not just the 80 percent that is common for home insurance policies. Homeowners and business owners alike should be aware of how coinsurance can affect coverage. You might not be as covered as you think, and it’s important to compare homeowners insurance companies.
Special Note for Older Homes: Where homeowners often get into trouble with coinsurance is in the case of older homes and home insurance policies that were written long ago. Many modern home insurance policies automatically adjust the coverage amount to account for inflation in rebuilding costs. Some policies don’t have this feature, particularly older policies.
A home purchased decades ago for tens of thousands and insured for a similar amount might cost over a hundred thousand to rebuild now. This can leave a massive coverage gap between what the insurer will pay and the amount needed to rebuild the home. The insurer will only pay up to the coverage amount you’ve purchased and smaller home insurance claims will be affected as well by deducting a percentage. Annual or biannual policy reviews with your agent are always recommended to help prevent unpleasant surprises if your coverage isn’t high enough to cover your potential loss.
Coinsurance for health insurance policies
With health insurance policies, coinsurance applies differently. First, the deductible must be met. After the deductible is met, then coinsurance applies as directed by the policy.
If your deductible is $2,000, you are responsible for that amount before your insurer starts to pick up part of the bill. The deductible applies for each policy period as opposed to the way it works for property insurance, which is per occurrence. There may be some exceptions with your health insurance policy where your insurer pays for some healthcare expenses before the entire deductible is satisfied, depending on your policy.
After the $2,000 deductible is paid, then the insurer pays based on the coinsurance percentage in your policy. If the coinsurance is 20 percent, your insurer will pay 80 percent after the deductible has been met. Until the deductible is met, the insurer pays nothing in most cases.
Coinsurance is the insurance industry’s way of telling you that you’re not fully insured.
Many people are aware of coinsurance in healthcare, perhaps vaguely, but may not have been clear on how the math works.
Unfortunately, when it comes to other types of insurance, most people don’t really understand how coinsurance can affect a claim until coinsurance has taken a big bite out of their claim settlement.