What is Coinsurance?

Robinhood Learn
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
Definition:

Coinsurance is the portion of your medical costs that you’re responsible for once you’ve paid your deductible for the year.

🤔 Understanding coinsurance

Most insurance plans come with a deductible, which is the amount you’ll have to pay out-of-pocket before your insurance kicks in. But even once you meet your deductible, you’ll often still have coinsurance. Coinsurance is the percentage that you’ll pay out-of-pocket, after you’ve hit your deductible — with your insurance company covering the rest. Coinsurance doesn’t apply without limit. Health insurance plans come with a maximum amount that you can be responsible for each year. Once you hit your out-of-pocket maximum, then there’s no more coinsurance, and your insurance company will pick up the rest of the bill.

Example

Let’s say you have a health insurance plan with a $1,000 deductible and 20% coinsurance. Early in the year, you’re in a car accident and break your leg. The cost of that hospital visit is $2,000. You’re responsible for the first $1,000 to cover the deductible. For the next $1,000, you’ll cover 20% — In this case, $200. Your insurance provider will pay the other $800. Now that you’ve met your deductible for the year, you’ll only be responsible for your coinsurance, or 20% of your medical costs until you hit your out of pocket maximum. On January 1 of the new year, it all resets.

Takeaway

Coinsurance is like your parents agreeing to pay for part of college if you pay for the rest…

College is expensive these days, and some parents might offer to chip in to help take some of the load off their kids. Someone’s parents might offer to pay for a particular percentage, while the kid pays for the rest. That’s kind of how coinsurance works, but for healthcare instead of college. And, of course, your insurance company is paying because you have an insurance policy with them, not just to help you out.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.
Sign up for Robinhood
Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

Tell me more…

What is coinsurance?

Coinsurance is the portion of your health care expenses for which you’re responsible. The term most often applies in cases of health insurance. Many insurance plans include a deductible, which is a set dollar amount that you have to pay out-of-pocket before your insurance kicks in. Until you meet your deductible, you’ll cover all or most of your medical expenses. But once you reach the deductible, you and your insurance provider will split the bill, until you hit your yearly out-of-pocket maximum. Your portion of the bill is known as coinsurance.

Coinsurance also appears in contexts outside of healthcare. Coinsurance clauses appear in business property insurance policies. Rather than referring to the percentage that you’ll pay for your expenses, it’s a requirement for how much insurance you have to carry.

Suppose you’re a small business owner, and you own a storefront for your business. Your insurance might include a coinsurance clause of 80%. This coinsurance clause means that the amount of insurance you purchase must cover at least 80% of the building’s value. If your storefront is worth $250,000, with an 80% coinsurance clause, you have to purchase insurance with a limit of no less than $200,000 based on the following formula:

$250,000 (building’s value) x 80% (coinsurance percentage) = $200,000 (minimum insurance limit)

If you have a coinsurance clause in your property insurance policy and you fail to meet that requirement, your insurance company might reduce your claim payments proportionately.

How does coinsurance work?

After you meet your health insurance deductible each year, you and your insurance provider split the rest of the costs. Coinsurance is a set percentage, and it varies for every insurance plan. The higher your coinsurance percentage, the more you’ll pay out of pocket.

Suppose you have an individual annual deductible of $500 and 25% coinsurance. Each time you visit the doctor, you’ll have to pay for your expenses out of your pocket (minus specific primary care and preventative services).

Once you’ve paid $500 out-of-pocket and hit your deductible, then your coinsurance kicks in. Each time you visit the doctor, you’ll pay 25% of the bill, while your insurance provider will pay the other 75% — until you hit your yearly out-of-pocket maximum.

How do deductibles work?

A deductible is an amount of money that your insurance company requires you to pay out-of-pocket before they’ll start covering your costs. Health insurance deductibles tend to fall somewhere between $500 and $1,500 for individuals and between $1,000 and $3,000 for families.

There are some costs that your insurance provider will probably cover before you hit your deductible. These covered costs include visits to your primary care provider and preventative care. But until you hit the deductible, you’ll have to cover everything else. Once you reach your deductible, your coinsurance kicks in.

Depending on where you’re getting your health insurance coverage, you might have an option between a high-deductible and low-deductible health plan. In general, you’ll pay higher premiums for a low-deductible plan, and your premiums will go down for a high-deductible plan.

Unlike other types of insurance policies — such as auto insurance, where deductibles apply to each claim — health insurance deductibles reset once per year. For example, suppose you have a $1,000 deductible that resets on January 1. Once you pay enough out-of-pocket medical costs to hit your deductible, you’ll only have to pay coinsurance. Your deductible won’t reset again until the following January 1.

What is the difference between coinsurance and a copay?

A copayment (aka copay) is a set amount of money that your insurance company will require you to pay out-of-pocket each time you visit the doctor or pick up a prescription medication. Copays are usually very low — They’re most often less than $30.

Your copay is a fixed amount you’ll pay each time (before and sometimes after hitting your deductible), while the coinsurance is a percentage of each bill that you’ll have to pay (after hitting your deductible).

When it comes to copays and coinsurance, it’s not one or the other. Most health plans will have both types of cost-sharing.

Let’s say you’ve already met your deductible for the year and are now paying your coinsurance. Now suppose you go to the doctor’s office for a small in-patient procedure. When you get to the doctor’s office, you pay your copay of $30. You have your procedure, and your doctor’s office sends the bill of $1,000 to your insurance company.

If you have a coinsurance of 20%, then your insurance company will pay $800 of the bill. The doctor’s office will send you a bill for the other $200. Between the copay and coinsurance, your total cost for the visit is $230.

What is an out-of-pocket maximum?

Your health insurance company will require you to pay a portion of each medical bill, but only up until a particular point. Most health insurance plans also have an out-of-pocket maximum. This amount is the most you’ll have to pay for your medical care in a year. Like your deductible, your out-of-pocket maximum resets annually.

Your maximum out-of-pocket consists of the following expenses:

  • Deductible
  • Copay
  • Coinsurance

Your annual limit will vary based on your insurance plan. The federal government limits how much insurance companies can have you pay toward your medical costs each year. In 2020, the limit is either $8,200 or $16,400, depending on whether you have an individual or a family plan. Your maximum might be lower than that amount, but it won’t be higher.

Suppose you have a health insurance plan with the following characteristics:

  • Deductible: $1,000
  • Copay: $25
  • Coinsurance: 20%
  • Out-of-pocket maximum: $6,000

Now let’s say that early in the year, you have a medical procedure that costs about $1,000. Now, each time you visit the doctor, you’ll pay your $25 copay and 20% of the medical bill.

Suppose that later in the year, your doctor diagnoses you with a chronic illness. Right off the bat, your doctor orders a bunch of tests. You’ll also have to come back in for regular follow-ups and will have to be on an expensive medication. If at some point during the year you end up spending $6,000 out-of-pocket, then you’re done paying for the year. Your insurance provider will pay for 100% of your covered expenses for the rest of the year.

Keep in mind that even after you hit your out-of-pocket limit, you’ll still have to pay some expenses yourself. First, you’ll have to continue to pay your monthly insurance premiums. You’ll also have to pay for any out-of-network services you receive and any medical services that your insurance policy doesn’t cover.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

1211202

Related Articles

You May Also Like

The 3-minute newsletter with fresh takes on the financial news you need to start your day.
The 3-minute newsletter with fresh takes on the financial news you need to start your day.


© 2020 Robinhood Markets, Inc. Robinhood® is a trademark of Robinhood Markets, Inc.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').

1200251