What is the primary purpose of insurance?

The primary purpose of insurance is to transfer risk from an individual or business to an insurer. This risk transfer mechanism allows policyholders to pay a premium to the insurance company, which, in return, agrees to assume the financial burden that may arise from specific risks, such as accidents, natural disasters, health issues, or liability claims. By doing so, insurance provides peace of mind, financial stability, and the ability to manage uncertain and potentially devastating events.

Through this risk transfer, individuals and businesses are protected from significant financial loss, enabling them to continue their operations or personal life with greater security. This concept is fundamental in understanding how insurance operates and its importance within financial planning and risk management strategies.

In contrast, the other options do not accurately capture the fundamental role of insurance. Insurance does not aim to increase financial risk, eliminate all risks—since risk is inherent in life and business—or guarantee profit from every situation. Instead, it serves to mitigate and manage the risks that people face, creating a safety net that allows for stability amidst uncertainty.