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What is 'Co-Insurance'

Co-insurance is the amount, generally expressed as a fixed percentage, an insured must pay against a claim after the deductible is satisfied. In health insurance, a co-insurance provision is similar to a co-payment provision, except co-pays require the insured to pay a set dollar amount at the time of the service. Some property insurance policies contain co-insurance provisions.

BREAKING DOWN 'Co-Insurance'

One of the most common co-insurance breakdowns is the 80/20 split. Under the terms of an 80/20 co-insurance plan, the insured is responsible for 20% of medical costs, while the insurer pays the remaining 80%. However, these terms only apply after the insured has reached the term's out-of-pocket deductible amount. Also, most health insurance policies include an out-of-pocket maximum that limits the total amount the insured pays for care in a given period.

Co-Insurance Example

Assume you take out a health insurance policy with an 80/20 co-insurance provision, a $1,000 out-of-pocket deductible, and a $5,000 out-of-pocket maximum. Unfortunately, you require an outpatient surgery early in the year that costs $5,500. Since you have not yet met your deductible, you must pay the first $1,000 of the bill. After meeting your $1,000 deductible, you are then only responsible for 20% of the remaining $4,500, or $900. Your insurance company will cover 80%, the remaining balance.

If you require another expensive procedure later in the year, your co-insurance provision takes effect immediately because you have previously met your annual deductible. Also, since you have already paid a total of $1,900 out-of-pocket during the policy term, the maximum amount that you will be required to pay for services for the rest of the year is $3,100. After you reach the $5000 out-of-pocket maximum, your insurance company is responsible for paying up to the maximum policy limit, or the maximum benefit allowable under a given policy.

Co-Pay Vs. Co-Insurance

Both co-pay and co-insurance provisions are ways for insurance companies to spread risk among the people it insures.  However, both have advantages and disadvantages for consumers. Because co-insurance policies require deductibles before the insurer bears any cost, policyholders absorb more costs up front. On the other side, it is also more likely that the out-of-pocket maximum will be reached earlier in the year, resulting in the insurance company incurring all costs for the remainder of the policy term.

Co-pay plans are more popular than co-insurance plans. They spread the cost of care out of over a full year and make predicting your medical expenses easier. A co-pay plan charges the insured a set amount at the time of each service. Co-pays vary depending on the type of service that you receive. For example, a visit to a primary care physician may have a $20 co-pay, whereas an emergency room visit may have a $100 co-pay. Other services such as preventative care and screenings may carry full payment without a co-payment. A co-pay policy will likely result in an insured paying for each medical visit.

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