Which of the following best defines the term 'insurance'?

The term 'insurance' is best defined as a legal binding promise of compensation because it refers to a contract in which an insurer provides a guarantee to pay the insured a certain amount in the event of a specified loss. This contractual relationship establishes the insurer's obligations to provide financial protection or reimbursement for covered losses, in exchange for payment of premiums by the insured.

In insurance, the focus is on the transfer of risk. By entering into an insurance policy, the insured mitigates potential financial burdens from unexpected events (such as accidents, illnesses, or property damage) by securing the promise from the insurer to compensate them for covered losses. This promise is enforceable by law, making it a legally binding contract.

Other options are not suitable definitions of insurance. A savings plan for future expenses does not encapsulate the risk management aspect of insurance; instead, it represents a method of accumulating funds. A loan for purchasing property generally involves borrowing money, which is distinct from transferring risk. Finally, a guarantee against all losses is misleading, as insurance typically covers specific types of risks and limits, not all potential losses. Each of these distinctions highlights why the legal binding promise of compensation is the concept that most accurately represents insurance.