Which statement best describes the relationship between premiums and policy limits?

The correct response highlights the direct correlation between policy limits and premiums. When a policy offers a higher limit of coverage, it indicates that the insurer is taking on a greater amount of risk. Consequently, to mitigate this risk and ensure adequate financial backing for potential claims, insurers typically charge higher premiums.

For example, if a homeowner opts for a policy with a higher replacement cost for their home, the insurer increases the premium proportionally to the risk associated with being liable for a greater payout in the event of a total loss. This principle applies across various types of insurance, including health, auto, and life insurance.

This understanding underscores the broader insurance principle that as coverage limits increase, so too do the costs associated with those policies. In contrast, the other options suggest incorrect relationships about how premiums interact with policy limits, which can lead to misunderstandings about insurance pricing structures.