Understanding Insurance Limits

You must make several critical decisions when selecting adequate coverage for your insurance needs. Primary considerations when buying insurance include the following:

• The types of coverage to purchase
• The deductible that will apply to your coverage
• The premium amount you can afford
• The policy limits

One of the most important decisions you'll face is selecting the insurance coverage limits for a given policy. The article below explains insurance limits and their role in insurance buying and filing claims.

What Is an Insurance Limit?

The insurance limit listed in your insurance policy represents the maximum amount your insurance company will pay for a particular type of coverage. You will typically find your policy limit on the declarations page of your insurance policy.

Various types of policy limits may apply. They may include the following:

• Per-occurrence basis
• Aggregate limits
• Per-person limits
• Combined limits
• Split limits

For example, consider auto insurance coverage. A per occurrence basis could be a $25,000 maximum payout for bodily injuries to a single person in a single-car accident.

Concerning medical expenses, an example of an aggregate insurance limit would be the annual limits on non-essential health benefits under your health insurance plan. If your claims exceed your policy's limits, you'll be on the hook for the amount above those limits.

Insurance plans may also include limits on the amount of money you have to pay out of pocket for different benefits. For example, your Medicare prescription plan may cap the amount you pay in deductibles or yearly copays.

How To Determine Your Insurance Policy Limits

Different types of insurance will have different coverage limits. How much insurance you need depends on several factors.

The following are a few of the common types of insurance coverage, how their limits are listed, and how to choose policy limits for each type of policy.

Auto Insurance Policy

Typically, car insurance policies will list liability limits as a set of three numbers. The declaration page may list car insurance coverage as 25/50/10. These are the liability coverage limits when you're responsible for an accident.

• $25,000 for bodily injury per person
• $50,000 total bodily injury coverage per accident
• $10,000 for property damage per accident

The limits for other types of coverage are usually listed as a single amount for each type. These coverages may include the following:

• Personal injury protection (PIP)
• Uninsured motorist coverage
• Underinsured motorist coverage
• Collision coverage
• Comprehensive coverage

Sometimes, state law dictates the minimum amount of coverage you need. Beyond the minimum, you can consider what would happen if you caused an accident and must pay vehicle repairs and medical bills.

Make sure you have enough liability insurance. Otherwise, you could face an expensive lawsuit. Typically, at least $100,000/$300,000 provides adequate protection—this means $100,000 per person per accident and up to $300,000 for any one accident, no matter the number of claimants. But you may need a higher limit to protect valuable assets.

Homeowners Insurance Policy

A homeowners policy will also list separate limit amounts for different categories of coverage. There will be one limit amount for liability coverage and another for medical payments. This protects the policyholder if sued by someone for injuries or property damage sustained on the homeowner's property. Another limit provides for covered losses up to the limit for damage to your home and personal property.

As a condition to obtaining a mortgage, most mortgage lenders and banks make homeowners insurance coverage a requirement. Even when not required, it's wise to purchase homeowners insurance. Homeowners insurance coverage can minimize out-of-pocket costs for a wide range of covered losses and bring peace of mind.

You should purchase enough coverage to:

• Rebuild your home
• Cover temporary living expenses
• Replace your personal belongings
• Pay for any injuries or damages that occur on your property

Coverage is subject to limitations and exclusions. Certain personal belongings with significant value may require special protection. You can purchase optional coverage and schedule personal property to ensure such property is covered. You can customize your coverage when it's necessary for your circumstances.

Health Insurance Policy

Healthcare laws are constantly in flux, and health insurance policies change yearly. Your plan may provide annual limits or limit the number of times you can receive certain types of treatment. Treatment limitations may apply to care, such as the following:

• Chiropractic services
• Acupuncture
• Orthotics

Insurance companies may also place limits on prescription drugs to keep costs down. These may include quantity limits (such as 30 pills within 30 days). Your insurer may also require step therapy. Step therapy is a process insurance companies use to require patients to take one or more alternative (cheaper) medications before the patient can receive the medicine prescribed by the healthcare provider.

Always review your plan to ensure you understand your coverage. Select the coverage that best meets your anticipated needs during open enrollment periods. This may require paying a higher premium or deductible to meet your needs.

Life Insurance Policy

A life insurance policy should cover your financial obligations if you pass away. You may have assets to cover financial commitments. Common financial obligations include the following:

• Childcare costs
• College tuition
• Final expenses (burial and funeral costs)
• Cost to care for dependents
• Outstanding debts (e.g., mortgages, auto loans, credit card debt, etc.)

When analyzing your situation, assets could include your real estate, current savings, taxable investments, and retirement savings. Once you consider your assets, you can better understand what policy limits you need for your life insurance policy.

How Are Insurance Limits Determined?

Several factors determine the insurance limits for a given policy. First, applicable federal or state laws may inform policy limits. For instance, each state sets the minimum requirements for auto insurance liability. These limits ensure drivers carry at least a certain amount of coverage. Likewise, federal law prohibits health insurance companies from imposing lifetime and annual limits on essential health benefits.

Your own needs and circumstances can dictate coverage limits. For example, you might need your homeowner's insurance to provide a dwelling coverage limit that covers the amount it would take to rebuild your $450,000 home.

On the other hand, your limits may also be dictated by what you can afford. Generally, higher limits correspond to higher monthly premiums. So, you'll need to balance your insurance needs with what you can afford every month. Your insurance agent can provide an insurance quote that fits your specific needs.

Need Help Understanding Your Insurance Rights?

As insurance laws become more numerous and policies become more complicated, it can be challenging to determine your rights under that policy. But you've been paying for certain benefits, and many laws exist to protect insurance consumers. Contact a local insurance attorney if your insurer denied your claim or is being uncooperative. They can explain your benefits and protect your rights.