What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential losses. This is the foundational principle of insurance; it is designed to manage risk by pooling resources from numerous policyholders. When an insured event occurs, such as an accident or a natural disaster, the insurer compensates the insured, thereby reducing the financial burden that could arise from unexpected events.

Insurance operates on the premise that while risks cannot be entirely eliminated, the financial consequences of these risks can be managed. By paying premiums, individuals and businesses can safeguard themselves against significant financial setbacks that could occur due to unforeseen circumstances. This aligns with the core objective of insurance, enhancing security and stability for individuals and communities.

The other options relate to different aspects of the insurance industry but do not capture its primary purpose. While generating profit is a concern for many insurance companies, it is not the purpose of insurance from the policyholder's perspective. Additionally, insurance does not cover all personal expenses or eliminate risks; rather, it mitigates the impact of certain risks. Understanding this primary goal of providing financial protection is crucial for anyone studying insurance.