What is the primary purpose of purchasing insurance?

The primary purpose of purchasing insurance is to share the risk of financial loss. This concept is foundational to how insurance works; individuals and businesses pay premiums to an insurance company in exchange for financial protection against potential losses or damages. By pooling resources from many policyholders, insurance companies can spread the risk of losses across a larger group, thereby making it more manageable for each individual or entity involved.

When an unforeseen event occurs, such as an accident, theft, or natural disaster, the financial burden of that loss is shared among all policyholders rather than falling entirely on one individual. This system provides peace of mind and financial stability, allowing individuals and businesses to recover more quickly from losses without needing to bear the full cost alone.

An understanding of this primary objective highlights the essential role of insurance in risk management, helping individuals and businesses safeguard their financial wellbeing against unpredictable occurrences.