What are insurance limits? [An Informational Deep Dive]

An insurance limit is the maximum amount your insurer may pay for a covered claim. Normally, this amount is clearly stated in your policy on the declarations page. If the cost of the damage exceeds the limit, you’re responsible for the additional costs.

Everyone with insurance should take the time to know their policy’s limits and make sure they don’t need additional coverage. You don't want to worry about your limit if disaster strikes, like a tornado tearing through your home.

Key takeaways

• Insurance limits are the maximum amount an insurer will pay for a covered claim. You're responsible for any costs beyond your insurance limit.

• Home insurance is often made up of different types of coverage, each with its own policy limit.

• When choosing liability insurance limits, consider the value of your assets, your liability exposure, state regulations, and how much risk you can handle.

• An insurance agent can help you choose the best policy limits for your needs.

How do insurance limits work?

Insurance limits are the maximum amount your insurer will compensate you for a covered claim. You'll have to cover the difference if your policy doesn't cover the full costs.

Often, a higher insurance limit means you’ll pay a higher premium. However, it also means the insurance company may pay more when you file a claim. You can often choose your insurance limit, which allows you to customize your coverage to suit your needs.

Specific insurance liability limits worth knowing include:

• Per-occurrence limits: The total your insurer will pay for a single claim.

• Per-person limits: The maximum an insurer will pay for a single individual’s claim.

• Combined limits: One limit that can be applied to several coverages.

• Aggregated limits: The total amount that can be paid for all claims during a period of time - the policy period, normally a year.

• Split limits: A limit set by a mix of per-occurrence, per-person, and aggregate limits.

Homeowners insurance limits explained

Homeowners insurance covers some or all of the costs of rebuilding your home and replacing your belongings. It may also cover living expenses or pay for injuries or additional damages.

Your mortgage may influence your policy limit. Lenders usually require coverage to repay your mortgage if your home is damaged.

Your home insurance is often a mix of different types of coverage like liability, dwelling, personal property, and loss of use. Each type has its own limits and requirements.

Liability coverage may protect you or a resident relative (or insured as defined in the policy) if found at fault for bodily injury or damage to another person’s property. For example, if a tree branch falls on your neighbor's car and your neighbor sues you, your liability policy may take care of the cost.

Often, you have a say in your liability limit and can pick between, for example, $100,000, $300,000 or $500,000. Other carriers offer more or less. If your net worth is over $500,000, you may want to consider additional coverage through an umbrella policy to protect yourself.

Dwelling coverage is often required by lending institutions to cover the full amount of your home loan. The replacement cost is determined by its size, age and other features. Lenders often require dwelling coverage. You’ll likely be required to have it unless you’ve purchased your home in cash.

If you do have a choice, get estimates on how much it would cost to rebuild your home. You'll want to ensure you can afford it in case of a catastrophe like a wildfire.

Personal property coverage is a percentage of your dwelling coverage, at times 50% of your dwelling limit, and covers the items inside your home. Although, if you have additional valuable items, you may have other sub-limits. Jewelry, firearms, art, bikes, and golf clubs are all examples of items that may need additional coverage or sub-limits.

If these items aren’t currently covered in your homeowner’s policy limit, you can also cover them with a scheduled personal property endorsement.

Loss of use coverage refers to payments your insurer makes to cover the cost of living expenses while your home is being repaired or rebuilt due to a covered loss. This can include anything from hotels to meals for a set amount of time.

Many homeowners also have an umbrella insurance policy to cover additional liability from unexpected costs on other items like cars, homes, or boats.

Your insurer may also have an insurance deductible or an amount you’ll need to pay out of pocket before anything is paid out.

Homeowner insurance coverage limits examples

Say a hurricane destroys your home, and you have a dwelling coverage limit of $300,000. As long as hurricanes are covered, and based upon the terms and conditions of your policy, your insurer may pay a maximum of $300,000 to rebuild your home. You will be responsible for the difference if the costs are more than $300,000.

Coverage limits and special limits - what’s the difference?

Coverage limits refer to the maximum amount your insurance policy will pay for a particular type of coverage after a covered loss. For example, your home insurance policy may have a coverage limit of $300,000 for dwelling coverage. This is the maximum amount the insurer will pay to rebuild or repair your home after a covered loss.

Special limits are sub-limits within a coverage that apply to specific categories of items or situations. These special limits are usually lower than the overall coverage limit. For instance, your home insurance policy may have a special limit of $2,000 for jewelry, regardless of your overall personal property coverage limit.

So, while coverage limits represent the maximum amount the insurer will pay for a specific type of coverage, special limits cap the amount they will pay for certain items or risks within that coverage. Special limits often apply to high-value or high-risk items like jewelry, cash, firearms, fine art, bicycles, and other collectibles.

Deductibles and special limits

A deductible is the amount you agree to pay out of pocket before your insurance pays a claim. So, if you have a covered claim, first you pay your deductible, then your insurance covers up to your limit, and you're responsible for any costs beyond that limit.

There are different types of deductibles - all other peril (general deductible) and by peril (applies to a specific cause of loss). For all other peril deductibles, they apply after a covered loss before your carrier will pay for the loss. Depending on the loss, you may have an additional by-peril deductible that applies as well. However, the deductible may be waived at times, for example, for valuable items you schedule or endorse separately.

For example, say you have a $1,000 deductible for home insurance, but you schedule your $5,000 engagement ring. If the ring is lost or stolen, the insurer would likely pay the full $5,000 limit for the scheduled item without requiring you to pay a deductible.

But if you didn’t schedule your engagement ring, you’d likely have to pay your deductible and be subject to whatever special limits your policy had for jewelry.

How to determine the right coverage limits for you

Determining the right liability limits for your homeowners insurance comes down to several factors.

• The cost to rebuild your home. Consider the construction cost, expensive features, and materials. You can always hire an appraiser or use online appraisal tools to better understand the cost of rebuilding your home.

• Additional structures. If you have a stand-alone garage, barn, fence, shed, or other structure on your property, consider the cost of repair or replacement.

• Your personal property. Estimate the value of all of your personal belongings, taking into account expensive items like jewelry and firearms, which could require additional coverage.

• Additional living expenses. If your home is damaged, you'll need a place to live and extra money to eat out. Keep in mind that, on average, it takes around seven months to build a home from the ground up.

• Extra peace of mind. Umbrella insurance provides extra liability coverage when your primary liability coverage falls short. Limits for umbrella policies typically start at $1 million but can be higher depending on needs and assets.

Once you add up the amount you'll need from each category, you'll know which policy is right for you.

Even if the type of insurance you're considering has a mandatory minimum limit, examine the details closely. Consider the cost of an accident and purchase additional coverage if needed.

Still have questions?

It's natural to wonder if you have the right plan in place. Here are some frequently asked questions to clarify confusion. You can also reach out to an insurance expert to discuss your specific situation.

Are there multiple limits in an insurance policy?

Yes, there are multiple limits in an insurance policy, given that many insurance policies are a collection of coverages – each with its own limit.

For example, a homeowners insurance policy may have dwelling, liability, and personal property coverage – each with its own limits.

What insurance limits do I need?

What insurance limits you need depends on what assets you need to secure and your risk tolerance. For home insurance, consider the cost to rebuild your home or replace any personal belongings.

Also, consider your financial situation—if you're at fault in an accident or someone gets hurt on your property, you want enough liability coverage to protect your savings and assets.

Many people also include umbrella insurance, which can cover additional expenses after your primary liability coverage is exhausted.

What limits are considered full coverage?

"Full coverage" isn't a specific limit—it's a term often used to describe a combination of insurance types that provide a comprehensive level of protection.

For home insurance, full coverage usually means you have protection for the structure of your home, your personal belongings, and liability for injuries or damages to others.

The actual limits of full coverage vary based on your individual needs, the value of your assets, and any lender requirements if you have a mortgage loan.

Can you sue an at-fault party if their insurance limits are insufficient to cover the entire loss?

This depends on a variety of factors, but if an accident or incident occurs and the damages exceed the at-fault party's insurance coverage limits, the injured party can pursue legal action for the balance.

However, whether you'll be able to collect the excess amount depends on the at-fault party's assets and financial situation. The insurance company itself will only pay up to its liability insurance limit.

What factors should determine your insurance policy limits?

For any limits of liability in insurance, start by considering how much your assets are worth—including your home, savings, and investments. You'll want enough coverage to protect these assets in case you're sued for damages or injuries. Also, think about local regulations and the potential costs of accidents or damage in your area; you might want higher limits if they're high. The goal is to balance protection with what you can afford in premiums.