What is the purpose of insurance policies?

The purpose of insurance policies is primarily to protect against financial loss in exchange for premiums. Insurance serves as a risk management tool that provides security and peace of mind. Individuals and businesses pay regular premiums to an insurance company, which in return agrees to cover specific risks or losses associated with certain events—such as accidents, theft, health issues, or property damage—up to a specified limit.

This protection allows policyholders to mitigate the financial impact of unforeseen events. For example, if someone has health insurance and incurs medical expenses, the insurance can significantly reduce the out-of-pocket costs. This foundational principle of transferring risk is what makes insurance an essential component of personal and business financial planning. Instead of bearing the full burden of financial loss alone, individuals or businesses can share this risk with an insurance provider.

The other choices do not accurately reflect the primary function of insurance. Some options focus on aspects like investment and income generation, which are unrelated to the central purpose of insurance, which is to provide risk protection.