Co-insurance
68All you need to know about insurance terms: Co-insurance
Curious about terms like co-insurance? If you are, read on...At some point of our lives, almost all of us will need to have insurance of some sort. There are various types of insurance, covering a broad array of products, from car insurance and annuities to life insurance. And of course, when you are buying any insurance policies, it is your duty to do your due diligence. Check for all terms and conditions before buying into one. In this article, I will talk mainly about co-insurance.
A co-insurance is an agreement between the insurance company and you whereby the insurance company will pay a percentage of the losses incurred and you wil pay the rest. Take for example a 90/10 co-insurance. This agreement simply means that you have to pay 10% of the damage and the insurance companies will cover the rest. Many companies are using this plan instead of the old co-pay structure.
Here, I am going to talk about the difference between co-pay and co-insurance. Co-pay is basically the same as co-insurance but instead of percentage, you pay a fixed amount of money to cover the losses. Let's do an example. Say, you suffer a loss of $1000. Now, in the co-pay structure, you are obligated to pay a fixed amount of money, say $200, each time the insurance service is assessed. But under the co-insurance structure, assuimg 90/10, you will pay $100 and the insurance company will pay $900. But in the real world, such things do not happen often because we have something called a deductible. What is a deductible? Don;t worry! I will explain it later.
The main reason why co-pay and co-insurance are created is to prevent moral hazard. Can you imagine what will happen if insurance is not regulated? So, let's say you buy a health insurance. Knowing that the insurance company will cover the medical bills for you, consumers will always have the incentive to get insurance companies to pay for 'every single damn thing'. The more the better, since we pay a hefty sum in premium, we might as well just make full use of it. So, naturally, insurance companies protect themselves with co-pay and co-insurance. You either fork some money out from your pocket or pay a fixed amount of money to use the service. Usually, the fixed amount you pay is more than the cost of the treatment itself. Co-insurance, for example, also prevents people from destroying their own properties to claim benefits. So, you insure your house for $80000. Without co-insurance, you burn your house down and you get the full amount but with co-insurance, if you burn your house down, you will only get a fraction of the money. Hence, there is no incentive for policy holders to destroy their own properties for money.
By now, I hope you have a clear idea of how co-insurance and co-pay work. Since there is a huge selection of insurance companies on the net, again, I will advice you to do your research properly without committing yourself to any insurance policies.
Related hub: Explaining Insurance Terms
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