What is the primary purpose of insurance?

The primary purpose of insurance is to transfer risk and responsibility in exchange for payment of a premium. This means that individuals or businesses facing uncertainties—such as health issues, property damage, or liability—can mitigate their financial exposure by purchasing insurance. By paying a premium, they transfer the potential financial burden to the insurance company, which agrees to cover certain losses as outlined in the policy.

This principle of risk transfer is fundamental to the insurance industry; it allows for the pooling of risk among many policyholders. In this way, when a loss occurs, the insurance company can use the premiums collected from a larger base of policyholders to pay out claims, thus ensuring that the financial impact is borne collectively rather than individually.

Other options like increasing wealth, minimizing taxes, and enhancing investment returns are not core purposes of insurance. While effective insurance management can lead to financial stability and even potentially foster investments in certain contexts, these are secondary benefits rather than the main rationale behind the establishment and functioning of insurance products.