What is the main purpose of insurance?

The main purpose of insurance is to protect against the risk of larger losses. Insurance functions as a risk management tool that helps individuals and businesses mitigate potential financial burdens resulting from unforeseen events, such as accidents, illnesses, property damage, or liability claims. By paying a premium, policyholders transfer the risk of significant financial loss to the insurance company, which provides compensation in case of covered events.

This protective mechanism ensures that individuals can recover more easily from adverse situations without facing overwhelming financial hardship. For instance, health insurance covers medical expenses, and auto insurance helps with vehicle repair costs following an accident, illustrating how insurance provides a safety net against substantial losses that could be financially crippling if borne alone.

In contrast, while insurance might sometimes offer tax benefits or be linked to investment returns, these are secondary aspects rather than its core purpose. Moreover, insurance does not eliminate financial risk entirely; it only helps manage it by providing a financial buffer when losses occur. Therefore, the essence of insurance lies in safeguarding against significant financial risks, making the option that refers to protection against larger losses the correct choice.