Which insurance term refers to the maximum amount an insurance policy will pay for a claim?

The term that refers to the maximum amount an insurance policy will pay for a claim is known as the policy limit. This is a crucial component of any insurance contract, as it outlines the maximum financial liability the insurer will assume in the event of a covered loss. Understanding the policy limit helps policyholders know the extent of their coverage and the potential financial protection available to them.

For instance, if a homeowner's policy has a policy limit of $300,000, that amount is the cap on what the insurance company would pay for covered damages to the home. If the damages exceed this limit, the policyholder would need to cover the difference out of pocket.

Recognizing this concept ensures policyholders are adequately informed about their coverage levels and makes it easier to make decisions about additional coverage or riders if higher limits are required.