In the context of auto insurance, what are "policy limits"?

The concept of "policy limits" in auto insurance refers specifically to the maximum amount an insurer will pay for a claim under the terms of the policy. This limit can apply to various aspects, such as bodily injury liability, property damage liability, and collision coverage, depending on the type of coverage purchased. Policy limits are crucial because they define the extent of the insurer’s financial responsibility in the event of an accident or other insured incident.

Understanding policy limits is essential for policyholders, as they help to set expectations about how much protection they will receive if they file a claim. This knowledge also influences their decisions when selecting coverage options, ensuring that they have adequate limits to cover potential losses they may face in an accident.

The other choices pertain to different aspects of auto insurance but do not accurately define what policy limits are. The total annual cost of all premiums paid relates to the cost of the insurance itself and indicates how much the policyholder must pay to maintain coverage. The minimum coverage required by law refers to the legally mandated amounts of insurance coverage that must be carried in certain jurisdictions, which ensures basic protection but is not what policy limits specify. The deductibles are the amounts that the policyholder agrees to pay out of pocket before insurance kicks in, which