Understanding Insurance Policy Limits

Buying a new insurance policy can feel a bit overwhelming. Searching for the best coverage at the best price from a reliable agency becomes even more complicated if you don’t know what you’re looking for – especially when it comes to policy limits.

Though insurance policies are filled with legalese that’s meant to clarify coverage, for the average person, even a phrase like “policy limits” can seem like a foreign concept.

WHAT ARE POLICY LIMITS?

No matter the type of policy you buy, or what situation you’re in, there is always a limit. These policy limits are the maximum amount an insurance company will pay per event. That means, if your homeowners’ insurance policy has a limit listed of $300,000, then that is the maximum amount your insurer will pay towards any claims you may file up to that amount, for the term outlined in your policy.

Planning for the Worst Case Scenario

Insurance limits are designed to protect and cover your particular exposures to loss. These limits are usually spelled out on the Declarations page of your policy. Be forewarned, if your coverage is inadequate in a particular arena, you cannot transfer limits from another category of your policy to cover it. This is why the choice you make today on policy limitations should be with an eye towards worst case scenarios and possible exposures, garnering you the highest possible payout to ensure that you can cover your losses.

Taking into account the value of your assets, you must work together with your agent to make sure that, should a policy limit claim be filed (these are rare but they do occur), your assets will be protected from court attachment. Keep in mind that the more you own, the more you risk losing.

MEETING WITH YOUR AGENT

Your insurance policy is a contract between you and your insurance company. It’s imperative that you read and thoroughly understand the parameters of any policy you sign and purchase.

It’s a good idea to remember to ask for several policy limitations to choose from when purchasing a new insurance policy. Be certain to ask for any clarifications you may need. Remember, your insurance broker or agent is there to provide you with advice and service, so take as much time as you need to understand the policy terms, limits, and conditions before finalizing your purchase. The potential consequences of this seemingly simple decision could prove to be a devastating financial loss for your family, if the proper limits are not secured. Here are some examples of what you should look for and understand.

PER OCCURRENCE OR PER YEAR POLICY

Some policies pay a maximum limit per year (or per policy), and others spell out a “per occurrence” structure. That means, if you have two claims at the maximum policy limit in one year, both will be paid.

AGGREGATE LIMITS

Some policies state an aggregate limit. This aggregate limit is the total amount your insurance company will pay to settle your claims. This means that any loss over the amount of this limit would be your responsibility.

SUBLIMITS

Some insurance policies contain sublimits. These are separate limits for add-on items to your policy, such as jewelry onto your homeowner or renter policy.

LIMITS OF LIABILITY

Some types of policies will carry a notice of “limits of liability.” That term is sort of a disclaimer, limiting the conditions or occurrences that your insurance company will pay out on a claim. Any costs beyond those limits would be your responsibility.

The definitions above, when paired with your complete knowledge of your assets and possible exposure, will help determine the limits you agree to on your policy. This information and a willingness to ask questions of your agent or broker, as well as a commitment to reading and understanding your new policy, will help you purchase policies that you can feel confident about.
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