What does the term "coverage limit" indicate?

The term "coverage limit" specifically refers to the maximum amount that an insurance company is obligated to pay for a covered claim. When a policyholder experiences a loss that is covered under their insurance policy, the coverage limit sets the upper boundary on how much the insurer will disburse for that claim. This limit is established in the policy and varies according to the type of insurance and the specific coverage selected by the policyholder. Understanding this concept is crucial, as it helps individuals determine whether they have adequate protection for potential losses, ensuring they are financially protected within the defined limits of their policy.