An insurance policy limit is how much money that insurance carrier covers, or the maximum amount of protection offered. Basic insurance, such as auto and homeowners' coverage, usually has policy limits in line with the value of that particular asset.
Policy limits vary widely across individuals, needs, and insurance carriers. Policy limits are part of your initial agreement with an insurance carrier. For example, based on the value of your home and the risk you incur as a typical homeowner, you may have liability insurance coverage up to $300,000 (the policy limit). If a settlement or judgment against you goes beyond that amount, your insurance company will not be held responsible, and you will be required to cover the remainder personally. Umbrella insurance provides added protection because it will pay beyond your basic insurance policy limits.But even umbrella insurance has a limit. When you sit down with your umbrella insurance company, you will be asked to detail your assets, risks, and other insurance policies to determine your umbrella policy limits. Of these details, your risk carries the most weight. Do you live in a wealthy part of town and affect the lives of many people? Do you own property on which others may become easily injured, such as a bar or an ice-skating rink? These details will play a significant role in determining your umbrella policy limits. People who run a greater risk of being sued may need an umbrella policy limit of $5 million or more.
