If you’re an insurance policyholder, there are a few key components of your policy that are important to understand. One such component is the coverage limit. When checking your policy, you should always review your coverage limits to ensure they make sense for your needs. Before buying a policy, you should also think carefully about what limit you want to choose, as it’s up to you to do so. Learn more about policy limits and how they influence your coverage and premiums below.
Insurance policy limits explained
When you enter into an insurance contract, whether it’s an insurance policy for your business or a standard homeowners insurance policy, there are several choices you will need to make. One such choice is the policy limits.
An insurance policy limit denotes the maximum amount of money that your insurance company will pay toward a claim. A policy limit is typically listed for each type of coverage added to your policy. So, for example, if you are buying your first car insurance policy, you can choose a coverage limit for coverage added to your policy, such as a limit of $1,000,000 for third-party liability coverage.
Please note that in some cases, it is entirely up to the policyholder to decide what coverage limit to include in their policy. However, in others, it might be the government or another entity, such as a lender, deciding it for you. For instance, since car insurance is required in Canada, provincial governments have a minimum coverage limit for liability insurance; it varies between $200,000 and $500,000 depending on what province you reside in. Meanwhile, if you lease or finance your car, your lender might have a minimum coverage limit for collision and comprehensive coverage, which they often require of borrowers. Be sure to speak with an insurance broker at BrokerLink before choosing a coverage limit to make sure that you comply with any requirements that may apply to you.
How insurance policy limits work
Insurance policy limits are located on the declarations page of your policy, which is usually at the very beginning of your contract. This page outlines the basic details of the agreement between the insurer and the insured.
As mentioned above, in most cases, each type of coverage has its own limit, though sometimes a single limit can apply to all or multiple types of coverage. As a policyholder, it is up to you to decide what coverage limits to choose for your policy, so long as you meet all legal requirements that may apply. When picking limits for each type of coverage, you should first ask what the limit range is the insurance company offers.
An insurance broker or agent can give you a clear range of the minimum and maximum coverage limits available to you. Keep in mind that the limit you choose reflects the maximum insurance reimbursement you will be eligible for in the event of a claim, less your deductible. For this reason, we recommend thinking long and hard about the potential cost of a claim, including a worst-case-scenario claim, e.g. if your car was totalled or your house burnt down in a fire.
After choosing your policy limits, your insurance company will then calculate your deductible options. From there, your premium will be set. Both coverage limits and deductibles play a significant role in determining your policy premium, which we will go into more detail about below.
The types of policy limits
You might be surprised to learn that multiple types of coverage limits can pop up in an insurance policy. We explain each below:
Per-occurrence limits
Per-occurrence limits are the maximum amount of money an insurance company will pay toward a single event or insurance claim.
Per-person limits
Per-person limits are the maximum amount that an insurance company will pay toward one person’s claim, e.g. a single driver on a car insurance policy.
Combined limits
Combined limits are a single coverage limit that is applied to multiple types of coverage on a single policy. For example, some insurance companies have a single limit on home insurance policies, in the event of a total loss they will pay up to this limit for repair or replacement.
Aggregate limits
Aggregate limits are the total amount of money an insurance company will pay out for all claims during a set period. The period of time for aggregate limits is typically one year.
Split limits
Split limits are a mix of per-occurrence, per-person, and aggregate limits.
Special limits
Lastly, special limits are unique in denoting a maximum insurance payout for a specific item listed on an insurance policy, e.g. an expensive work of art or a piece of fine jewellery listed on a home insurance policy.
How to choose your coverage limits
There are a number of factors that should go into deciding your policy limits. However, they vary depending on what type of insurance you are buying. Below, we provide some insight into how to choose your coverage limits for car insurance, home insurance, and life insurance:
Auto insurance coverage limits
When choosing a car insurance coverage limit, you must first make sure that you meet the minimum requirement. If you choose a limit that is below the minimum requirement, your policy will be invalid and you will be unable to legally drive until you change your car insurance policy. Further, it’s important to note that the minimum coverage requirements in many provinces may not be sufficient for a major accident. Thus, when selecting an auto insurance policy limit, consider how much your vehicle costs and the potential costs of an accident, especially an at-fault accident or one where your car is totalled. Find out more about if car insurance settlements are taxable here.
Home insurance coverage limits
Next, when selecting coverage limits for homeowners insurance, make sure that you meet any minimum requirements laid out by your lender. For example, if you took out a mortgage on your home, your mortgage lender will likely have a certain amount of home insurance coverage that you are required to add to your policy. Beyond this, it’s essential to consider how much it would cost to rebuild your home or replace all personal belongings in your home if needed. Your coverage limit should then reflect that amount.
Life insurance coverage limits
All life insurance policies should contain coverage limits. But choosing a limit that makes sense is where things can get tricky. Generally, your coverage limits should equal the financial obligations for the amount of time you wish to cover minus the value of your assets. Examples of financial commitments that your life insurance policy should cover include estate taxes, funeral and burial fees, outstanding debts, funds for the beneficiary’s bills, adjustment period, and ongoing expenses. A general rule of thumb for life insurance is choosing a policy limit of roughly ten times your annual income.
Insurance policy limits vs premiums vs deductibles
Given that policy limits, deductibles, and premiums all go hand-in-hand, we’re not going to take the time to explore these three important components of an insurance policy. In their most basic forms, limits, premiums, and deductibles are as follows:
- Limits are the maximum amount of money an insurance provider will pay for claims filed under a specific type of coverage.
- Premiums are the amount of money that a policyholder pays per month or per year in exchange for coverage from a provider.
- Deductibles are the amount of money a policyholder must pay toward an insured loss before their insurance goes into effect, e.g., before an insurance company issues a payout. This is typical in most home and auto insurance policies.
Please note that policy limits and deductibles can be raised or lowered at the policyholder's discretion, so long as the limits comply with local laws or contractual obligations. Both limits and deductibles play a big role in determining your insurance premium, as they both relate to how much money an insurance company is required to pay out in the event of a claim, i.e. the amount of financial responsibility that the insurance company has compared to the policyholder.
Since we’ve already discussed policy limits, let’s briefly overview deductibles and premiums below:
Deductibles
A policy deductible is the amount of money that a policyholder must pay out of pocket in the event of a claim before the insurance company will step in and issue a payout. Insurance companies typically offer a range of deductible options to policyholders, and it is up to each policyholder to decide on what deductible amounts they wish to choose. Unlike coverage limits, no laws or contract clauses usually stipulate a minimum deductible that a policyholder must choose. However, like policy limits, policyholders must usually select a deductible for each type of coverage on their policy.
Generally speaking, low deductibles result in higher premiums and high deductibles result in low premiums. This is because a high deductible means that policyholders will be required to pay more in case of a claim.
In turn, the insurance company will not have to issue as large of a payout. In addition, policyholders that have high deductibles may be less likely to file insurance claims since there might be some cases where the cost of the damages is equal to or less than the cost of the deductible, making filing a claim a pointless endeavour.
Premiums
Next, insurance premiums are the amount of money that a customer pays for their insurance policy. This amount is usually paid on either a yearly or monthly basis. It is up to the insurance company to calculate your premium. Insurance providers use complex risk-calculation formulas to determine premiums. Since each insurer has its own formula, it is worthwhile for customers to shop around and obtain quotes from multiple providers, as you may receive different premiums from different providers.
The insurance premium that is assigned to you is the culmination of a wide variety of factors that an agent will assess. While the coverage limits and deductibles you choose are two of these factors, several others will come into play. They vary based on what type of insurance policy you are buying. Using car insurance as an example, an insurance agent will look into the following factors and possibly more when assessing your rates:
- Where you live
- Age
- Gender
- Vehicle type
- How you use your vehicle
- Driving record
- Driving experience
- Past claims
- Prior insurance coverage
- Number of kilometers you drive
- Type of coverage on your policy
- Your coverage limits
- Your deductibles
For a free insurance quote, contact BrokerLink today.
Find out more about coverage limits in insurance by contacting BrokerLink today
If you are eager to learn more about coverage limits, call BrokerLink today. We can explain how coverage limits work and how they impact your premium. We can also help you cancel your insurance policy and purchase new coverage if you decide that is best for your needs. As insurance experts, we can also explain reinsurance and double insurance, help you modify your policy, and even provide you with a free quote. Get started today!
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