A limit represents the maximum benefit an insurer will pay a policyholder in the event of a specified loss. In other words, regardless of the magnitude of the loss, the insurance company will not reimburse the insured for more than the predetermined amount. With regard to homeowner's insurance, coverage limits can apply to personal property, the overall replacement value of the home, liability coverage, and more. Typically, the insurer and homeowner set these figures together when the house insurance policy is created.

Homeowner's insurance coverage limits come in a variety of forms. We've outlined the those most commonly associated with house insurance policies below.

How These Are Set

The limits are mutually agreed upon by the insurer and the homeowner when the policy is purchased. Insurers offer a variety of options from which policyholders can choose. The purpose of these is to contain the insurer's risk in underwriting the policy. Of course, if policyholders chose larger coverage limits, they will also have to pay larger premiums. This is because in the event of a loss, the insurer will be financially responsible for a greater portion of the costs if the homeowner has selected high coverage limits. To compensate for this added risk, insurers charge more expensive premiums.