How limits are determined depends on the type of coverage.

Car insurance coverage limits

Auto liability coverage limits are mandated by state law. Each state sets minimum limits drivers must purchase. Keep in mind, though, that this is just a starting point, and you may want to increase your liability limits by purchasing more coverage, depending on your circumstances.
Comprehensive and collision coverage limits are equal to the actual cash value of your vehicle at the time of the accident. In other words, if your car is totaled in a collision, your policy may pay up to the vehicle's current value, which considers depreciation.

Coverage limits for home insurance policies

You choose your limits for other coverages, such as those for dwelling or personal property coverage. Your decision should be based on certain factors, such as the cost to repair, replace or rebuild your property. The limits you choose affect the amount you pay for coverage — the higher your limit, the higher your premium likely will be.

In the event of a covered claim, you may have to pay a deductible up front, and your insurance will help pay the rest — up to your coverage limits. You're responsible for anything beyond that.