Why do people purchase insurance?

People purchase insurance primarily to protect against unforeseen risks and larger financial losses. Insurance serves as a safeguard, providing financial security and peace of mind in the face of unexpected events such as accidents, illnesses, property damage, or liability claims. By paying a relatively small premium, individuals can mitigate the financial impact of these risks. This means that, in the event of a loss, the insurance policy can help cover costs that would otherwise be a significant, potentially devastating financial burden.

The nature of insurance is to transfer the risk from an individual to the insurance company, enabling policyholders to manage potential financial hardships without bearing the full brunt of the expense. This protective function is a key reason why individuals and businesses opt to purchase various types of insurance, from health to auto, home, and life insurance.