What is the purpose of insurance?

Insurance serves as a financial safety net, designed to protect individuals and businesses from the financial impact of unforeseen events such as accidents, illnesses, natural disasters, or other unexpected circumstances. By paying a relatively small premium, policyholders transfer the risk to the insurance company, which in return provides compensation or coverage for specific losses, helping to mitigate the financial burden during difficult times.

When an insured event occurs, the insurance acts to cover the costs associated with that event, thereby helping individuals and families maintain their financial stability. This protection can be essential for managing risks in various facets of life, including health care through health insurance, property protection through homeowner's or rental insurance, and liability coverage through auto insurance, among others.

The other choices hint at aspects that are not primary functions of insurance. For instance, guaranteeing profits on investments misrepresents the nature of insurance, which does not promise investment returns but rather protection from loss. Encouraging unnecessary spending contradicts the fundamental purpose of insurance, which is to manage risk rather than promote expenditure. Lastly, while some insurance policies can offer tax benefits, the overall primary purpose remains financial protection against unexpected events.