What do coverage limits refer to in insurance policies?

Coverage limits in insurance policies refer to the maximum financial protection that an insurer will provide in the event of a loss. These limits are established during the policy issuance and are crucial for determining the extent of coverage available to the policyholder. For example, if a homeowner's policy has a coverage limit of $300,000 for property damage, that means in the event of a covered loss, the insurer will pay out up to $300,000, not exceeding that amount. This ensures that the policyholder is aware of the maximum payout they can receive, which allows for better financial planning and risk management.

Understanding coverage limits is vital for individuals and businesses to ensure that they have adequate insurance to cover potential losses without being underinsured. It also highlights the importance of reviewing and adjusting these limits according to changing needs or circumstances, such as property value increases or changes in risk exposure.