How Do Insurance Coverage Limits Work?

In general terms, insurance is a pretty simple concept: you pay a premium and in exchange, you receive financial protection in case of unexpected financial losses (like an emergency, theft, or medical cost).

However, when it comes to selecting an insurance plan, there are several questions you may want to answer, including:

• What type of plan is it?
• What’s covered?
• How much is the premium?
• What’s the deductible?

Another topic you’ll want to have a grasp on is insurance coverage limits.

What Is an Insurance Limit?

They say there’s a limit to everything. And that applies to insurance as well.

An insurance policy limit is the max amount an insurer may pay out for a claim on each type of coverage you carry. While different factors can influence the limits, all insurance policies have one.

How Do Insurance Policy Limits Work?

While there are different types of insurance policy limits (including per-occurrence limits, per-person limits, and aggregate limits), the idea is always the same. Your insurer will pay up to the established policy limit minus your deductible, and anything beyond that limit falls on you to cover.

It’s sort of like if you have a gift card but it doesn’t cover the whole bill … any cost beyond the gift card total comes out of your pocket.

How Are Coverage Limits Determined?

There are a few factors that can help determine limits for a policy.

State and federal requirements

Depending on the type of coverage, state or federal requirements can have an impact on the limit. For example, nearly every state has a set minimum requirement for auto liability coverage. So that creates a base for your car insurance coverage limit that you must meet. You can use this required amount as your max limit, or you can always increase it if you feel you want or need more.

Your risks and finances

When it comes to your situation, it’s important to factor in your risks, finances, and even the value of your assets. Using the car insurance example again, if you’re prone to getting in fender benders, then you might want to consider a higher liability coverage limit as that means more insurance available to cover damages. It can also be helpful to consider how much coverage you would need — based on your financial situation — in a worst-case scenario such as totaling your car.

It’s also important to know that the higher the limit, typically the higher the premium, and vice versa. So keep that in mind when selecting your policy limit.

What Is an Example of a Coverage Limit?

As mentioned above, nearly every state has a minimum requirement for auto liability coverage. So this is an easy way to present an example of a coverage limit.

Let’s say you’re looking for auto insurance in Nevada. According to the Nevada Division of Insurance, the minimum policy limits are 25/50/20. This means that, in Nevada, the minimum state-mandated car insurance limits are:

• $25,000 for bodily injury per person — the total amount an insurer will pay for injuries you cause to any one person
• $50,000 for bodily injury per accident — the maximum amount an insurer will pay for all injuries that you cause in an accident
• $20,000 for property damage — the total amount that an insurance company will pay out for all property that you damage in an at-fault accident

From there, if you feel like you need more than the minimum, you can work with your insurer to view their policy options and choose one with a higher limit. The ideal goal is to find the right balance where you’re adequately insured while also paying a premium that fits within your finances.

This is just one example, but you get the gist of how it works.

Bottom Line

Knowing your insurance coverage limit is vital because it has a direct link to how much you may owe out of pocket.

Always be sure to review your policy so you’re aware of what your coverage limits are. And if you’re looking for more coverage or lower costs, Credit One Insurance allows you to compare rates from over 40 carriers instantly to find the best option for you.