What are "policy limits" in insurance?

Policy limits in insurance refer to the maximum amount that an insurer will pay for a covered loss under a policy. This is a critical concept because it defines the financial boundaries of a policyholder's coverage. When a loss occurs, whether it's due to an accident, property damage, or liability, the insurer will only pay up to the specified limit outlined in the policy.

For example, if a homeowner has a policy limit of $300,000 for their home insurance, and they incur damage costing $400,000, the insurance payout will not exceed the $300,000 limit, even though the losses are greater. This is why understanding policy limits is essential for policyholders to ensure they have adequate coverage for their needs.

In contrast, minimum coverage required by law relates to the baseline insurance requirements mandated by state regulations, which may not fully cover all potential losses. The total amount paid in premiums over time provides insight into costs incurred by the policyholder but does not represent coverage. Similarly, the average claim payout across all policies indicates general trends in claims but does not define the specific limits on individual policies.