What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential future losses. This concept is foundational to understanding how insurance works. Essentially, insurance acts as a safety net that helps individuals and businesses manage the financial risks associated with unexpected events, such as accidents, natural disasters, theft, or health issues.

By pooling premiums from many policyholders, insurance companies are able to share the risk and pay out claims to those who suffer losses. This mechanism allows policyholders to transfer their risk to the insurance company, ensuring that they have financial support in times of need. In this way, insurance promotes peace of mind, knowing that there is a financial resource available to mitigate the impact of unforeseen circumstances.

While other options might reflect certain aspects of the financial landscape, they do not capture the fundamental role of insurance in risk management and financial protection. For instance, investing savings for growth or complying with regulations may be associated with finance and legal frameworks but do not encompass the core function of insurance itself. Similarly, while insurance products can have tax benefits, such as life insurance in terms of not being taxed at death, this is not their primary purpose.