In Finance, what is a Policy Limit?

The policy limit is the maximum amount that an insurance provider will pay on claims made against a currently active policy. Many policies are written so that more than one type of policy limit is detailed in the terms and conditions. This effectively creates a situation where there is a limit on the liability that an insurance company will pay on a specific claim, as well as a cap on the total amount that the provider will pay out in claims over the life of the policy.

While many people pay close attention to such matters as deductibles, co-pays, and the amount of the monthly premium, consumers do not always look at the policy limit as it applies to specific events that are covered in the terms of the policy. For example, an individual may be aware that his or her health insurance coverage does have a deductible that must be met before the policy will begin to cover a specific percentage of the costs of a hospital stay, but not be aware that there is a policy limit on the total amount that the provider will pay for the overall hospital stay. Because some policies are written with a yearly policy limit, while others are written to include a cap on a per claim basis, it is important to read all the terms and conditions in order to know how and when the limits apply.

The same is true with other forms of insurance, such as auto coverage. Many providers detail a specific policy limit on collision and other aspects of the contract. If the policyholder is involved in an accident and exhausts the coverage, all remaining expenses must be handled out of pocket.

There are examples of insurance coverage that do not come with any type of policy limit. However, policies of this type usually carry a higher monthly premium. This is because the insurance provider is assuming a higher degree of risk by extending these unlimited benefits. The higher premiums supply the provider with additional funds to invest and create resources that can be called upon in the event that a policyholder with this type of coverage does experience some catastrophic event that creates a great deal of expense.

For people who are on a tight budget, it may be necessary to secure insurance coverage that includes a modest policy limit. As finances improve, many providers are happy to upgrade reliable customers to policies that include more attractive terms and conditions, including an increase on the policy limit. When applying for any type of insurance, always inquire specifically about the limits on the policy under consideration, as well what would be involved in upgrading the coverage at a later date.