Coinsurance is a type of insurance in which the insurer and the insured split risks with each other. In addition to lowering the cost of insurance for the insured, coinsurance also benefits other people who are insured with the same company, by ensuring that the insurance company will be able to pay all claims. Before purchasing coinsurance, you should make sure that you fully understand the terms, as coinsurance can get confusing, and you may find yourself in an awkward situation.

Basically, when you sign up for a coinsurance policy, you insure something at less than its face value. Insurers may do this because they know that a structure or possession can be replaced for less than face value, or because they are willing to pay some out-of-pocket expenses to keep their insurance rates down. If a claim is made on the policy, the insurer pays their share of the coinsurance while the insured is expected to pay any remaining balance.

For example, if you insure a structure which is worth $100,000 US Dollars (USD) under an 80/20 coinsurance policy, your insurance company agrees to pay $80,000 US in the event that you make a claim on the policy, and you will have to make up the difference. However, you should be careful, because coinsurance clauses are often built into insurance policies. In an insurance policy with a built-in coinsurance clause, you might insure that structure for $80,000 USD, thinking that you are willing to pay $20,000 USD in the event of a claim, and end up paying $36,000 US, because the insurance policy has an 80/20 coinsurance clause.

Health insurance plans often use coinsurance as well. Typically, coinsurance kicks in after the deductible has been paid. If your policy has a $500 US deductible, once you have used the deductible, you will be responsible for a set percentage of your medical expenses. An 80/20 coinsurance plan is common for healthcare, although greater and smaller percentages are also possible. Do not confuse coinsurance with a co-pay, in which you pay a set amount for each medical visit, not a set percentage.

When used wisely, there are some definite advantages to coinsurance. These plans can save money on insurance premiums, and as long as you remember to set money aside so that it is available in the event of a catastrophe, a coinsurance plan can work out very well. When purchasing any form of insurance, make sure to ask about coinsurance clauses so that you understand how much your insurance company will pay in the event of a claim.