What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential losses or risks. This protective function allows individuals and businesses to mitigate the impact of unforeseen events that could lead to significant financial strain, such as accidents, natural disasters, illness, or other unexpected occurrences.

Insurance operates on the principle of risk management, where policyholders pay regularly scheduled premiums to an insurer. In return, the insurer agrees to cover certain financial risks, enabling individuals and businesses to continue their operations or maintain their livelihoods even in the face of loss. By pooling risks among many policyholders, insurance helps distribute the burden of loss, making it more manageable for those affected.

While concepts like investment opportunities, retirement savings, and income guarantees during unemployment are important financial considerations, they do not capture the fundamental role of insurance. Those aspects may be achieved through different financial planning tools, but the essence of insurance remains its function of risk transfer and financial protection.