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Understanding The Role of Insurance Limits in Your Policy

While homeowners insurance policies will cover your home under many circumstances, these policies also often have limits. It is important to know your policy insurance limit to avoid unexpected out-of-pocket costs.

What Is an Insurance Limit?

A policy limit refers to the most an insurance company will pay for a specific type of coverage. This means each type of coverage on your policy, such as dwelling, personal liability, and personal property, will have its own limit. Any remaining expenses are your responsibility once you reach the policy’s limit. For example, if your homeowners insurance has a limit of $300,000 for dwelling coverage but the damage done to your home exceeds that amount, your insurance will only pay up to $300,000 and any remainder will be your responsibility to pay out of pocket.

Limits vs. Deductibles and Premiums

You will often hear insurance terms like limit, premium, and deductible. They are all important components of your homeowners insurance policy. A limit is the maximum amount the insurer will pay for specific coverage, such as dwelling, personal property, or liability. If your policy has a $400,000 personal liability limit, then your insurance will only pay up to that amount for a personal liability claim if someone is injured on your property.

A deductible is an amount that you, as the policyholder, will pay if there is a covered claim before the insurance limit steps in to provide coverage. For example, if your dwelling deductible is $1,000 and a tree falls on your roof and causes $4,000 of damage, you must pay $1,000 out of pocket before your insurer will cover the remaining $3,000.

A premium is the recurring cost you pay to keep your insurance policy active. This is usually paid monthly, quarterly, biannually, or annually. 

How Insurance Policy Limits Work for Home Insurance

The limits on your homeowners insurance policy clearly outline the maximum amount you will receive if there is a covered loss. There are specified limits for most coverages, including dwelling, personal property, and liability. The coverage amounts can be found on your homeowners declarations page within your policy.

Setting Your Home Insurance Policy Limits

When considering policy limits, factor in current market costs of building materials and consumer goods, the risk of where your home is located, and any minimum requirements that may be in a written contract or agreement with you. Some banks will require you to have a specific insurance-to-value amount, or if your home has a Home Owners Association (HOA), they could require higher liability limits than what is standard on a homeowners insurance policy. Bear in mind that the higher the limits are, the more premium you will pay.

Types of Homeowners Insurance Limits

A homeowners insurance policy contains several insurance limits, and you should always read your policy in its entirety. Some coverage limits include:

  • Personal property: The items in your home that are not part of the structure of your home are considered personal property. This includes everything from your clothing to your silverware. Usually, this amount will be calculated as a percentage of the dwelling amount you select. However, it can be increased if you have a lot of personal property in your home. Keep an inventory that you can access easily just in case you need to file a claim.
  • Dwelling: Dwelling coverage is concerned with the actual structure of your home, like the walls and roof. The limit is determined by a combination of factors, including lender requirements and facts about the home, such as square footage and building materials. If you get to choose your limit, which is not always the case, be sure to check on the costs of materials, as that can change significantly.
  • Liability: Should someone get hurt while on your property or you damage someone else’s property, the liability limit will step in if it is a covered claim. The liability limit is typically around $100,000 to $500,000, depending on the insurance carrier. Consider a higher limit if you are in a high-traffic area for people on your property.
  • Loss of use: Loss of use coverage limits vary between insurance companies, but it is often a percentage of the dwelling amount. If your house is so damaged by a covered peril that you need to temporarily relocate while it is repaired, this coverage provides help. Some carriers will pay for hotels, apartments, and meals up to the policy limit or for a specified amount of time. 

Insurance Riders and Limits

Many homeowners use riders or endorsements to provide extra coverages to their standard homeowners insurance policies. Just like all the other specified coverages, riders have maximum insurance limits as well. Some common homeowners insurance policy riders are:

  • Scheduled personal property: You may have some valuable possessions in your home, like art, jewelry, or guns. Most homeowners insurance policies put a sub-limit on these items, meaning within your personal property limit of $100,000, jewelry specifically may have a limit of $2,500, art may have a limit of $5,000, and so on. A scheduled personal property rider allows you to give each high-value item its own specific limit on the policy so you aren’t stuck paying the difference should there be a claim.
  • Water backup: Water damage from a drain that is backed up or sump pump overflow is typically excluded from a standard homeowners policy, but can be added with an endorsement. This would allow you to set a separate limit for this type of peril.
  • Identity theft: Since technology is crucial to our everyday lives, identity theft has become a real issue. You can add an identity theft rider to your policy to cover things like legal fees and other costs you incur due to the theft.

When You Need More: Umbrella Policies

Many homeowners insurance policies have a liability limit of $100,000 to $500,000, and if you feel that is not enough, you may want to consider an umbrella policy. You and your family may need personal umbrella insurance if you exceed the limits on your auto and homeowners policies. Without the right level of coverage, your assets, home equity, retirement savings, and more could be at risk. An umbrella policy covers personal injury liability, including slander, defamation, and libel; incidents abroad; rental liability that can come in handy when you are on vacation; and legal and defense fees.