What is a policy limit in insurance?

A policy limit in insurance refers to the maximum amount that an insurer is obligated to pay for covered losses under a particular insurance policy. This limit is a key aspect of a policy, as it determines the upper boundary of financial protection provided to the insured. In the event of a claim, the insurer will cover losses only up to this limit, meaning that if damages exceed the policy limit, the insured may be responsible for the additional costs.

Understanding the concept of the policy limit is crucial for policyholders, as it influences both risk management decisions and financial planning. It ensures that individuals or businesses have clarity about how much coverage they have and helps them assess whether they need additional insurance or higher limits based on their exposure to potential losses.