Insurance Policy Limits

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Policy limits represent the highest amount that an insurance company is required to pay on your claim.
Policy limits represent the highest amount that an insurance company is required to pay on your claim. (Image: business image by peter Hires Images from Fotolia.com)

The term "insurance policy limits" refers to the monetary amount that an insurance company will pay out in conjunction with a specific insurance policy claim. Insurance policy limits are contractually agreed upon at the time an insurance policy is created.

Purpose

The purpose of insurance policy limits is to create a definitive contractual obligation between an insurance underwriter and the insured. The insured advises the insurance company how much insurance coverage he or she requires and the underwriter determines the corresponding deductible and premium that the insured must pay.

Common Policies with Limits

Common insurance policies that operate on the principal of specified limits in exchange for periodic premium payments include car, homeowner's, flood, life, general business liability and professional liability insurance.

Choosing Policy Limits

Before you purchase an insurance policy, you should carefully assess your specific policy limit needs. For example, a homeowner's policy should not have limits lower than the market or mortgage loan value of your home. However, the higher your policy limits, the higher your periodic premiums and deductibles.

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