What is the purpose of a stop-loss limit in insurance?

The purpose of a stop-loss limit in insurance is to restrict the insured's financial participation after they have incurred a specified amount of costs. In practice, this means that once the insured's expenses exceed a certain threshold, the insurer becomes responsible for all subsequent expenses, thereby protecting the insured from excessive out-of-pocket costs. This feature is particularly important in health insurance, where medical expenses can escalate quickly and unpredictably. By establishing this limit, the insurance policy provides a safety net, ensuring that individuals do not face financial ruin due to high medical bills.

The other options do not accurately describe the function of a stop-loss limit. Setting a maximum coverage for a policy relates to the overall limit of what an insurer will pay, while defining a maximum deductible amount pertains to the initial costs an insured must pay before coverage kicks in. Specifying payment terms for exceptional claims deals with how claims are processed, not the mechanism of protecting the insured from high costs.