What is a 'policy limit' in insurance?

A 'policy limit' refers specifically to the maximum amount that an insurer is obligated to pay for claims arising from a particular insurance policy. This limit is established at the time of the policy issuance and defines the insurer’s financial responsibility in the event of a claim.

Understanding this concept is crucial because it impacts how much protection the insured has under the policy. For example, if a policy has a limit of $100,000 and a claim occurs that amounts to $150,000, the insurer will only pay up to the limit of $100,000, leaving the insured responsible for the remaining amount. This helps policyholders gauge the adequacy of their coverage according to their potential risks.

The other options refer to different aspects of insurance but do not define a 'policy limit' accurately. For instance, the minimum amount of coverage required by law pertains to mandated insurance regulations, while the total premium amount relates to what the insured pays for coverage rather than the coverage itself. Additionally, the duration for which coverage lasts speaks to the policy term rather than the financial boundaries of claims.