Coinsurance Formula
What Does Coinsurance Formula Mean?
The coinsurance formula is used to calculate how much a homeowner will receive from an insurance company in the event of a loss, based on their coverage level. Typically, if the homeowner has insurance coverage for at least 80% of the home’s replacement value, they are eligible for full coverage in the event of a total loss. However, if the coverage is less than 80%, the coinsurance formula will determine the amount the insurance company will pay. The formula accounts for the actual coverage purchased relative to the required coverage percentage.
Insuranceopedia Explains Coinsurance Formula
The coinsurance formula is calculated as follows: (actual coverage amount ÷ 80% of the replacement value) × the amount of the loss. This formula determines the dollar amount the homeowner will receive for major or total losses on their home. If a homeowner does not have at least 80% coverage of the home’s replacement value, they could face significant financial loss in the event of a total loss. Therefore, maintaining adequate insurance coverage is essential to avoid large out-of-pocket expenses.
