What is the primary purpose of insurance?

The primary purpose of insurance is to provide a safety net against larger losses. Insurance is designed to protect individuals and businesses from financial hardship due to unforeseen events such as accidents, natural disasters, illness, or theft. It operates on the principle of risk pooling, where many people contribute to a common fund. When a significant event occurs, the costs are covered by this pooled fund, allowing individuals to avoid facing potentially devastating expenses on their own.

While generating profit from investments is an aspect of how insurance companies operate, it does not reflect the fundamental purpose of insurance itself. Similarly, covering routine expenses does not accurately describe what insurance is meant for, as it is not intended for predictable, ongoing costs. Lastly, while some types of insurance can be tied to retirement plans or savings vehicles, that is not their primary purpose; retirement plans are specifically designed to accumulate funds for future retirement needs. Thus, the primary objective remains to mitigate the financial impact of larger, unpredictable losses.