What is a key feature of insurance as a risk management tool?

A key feature of insurance as a risk management tool is that it allows individuals to pool risks with others. This principle, known as risk pooling, is fundamental to the insurance process. By sharing the financial burdens associated with risks among a large group of people, insurance can provide coverage for adverse events (such as accidents, illnesses, or property damage) that would be difficult for individuals to manage on their own.

When many individuals come together and contribute to a pool, the insurer is able to predict losses more accurately and spread the costs among all members. This collective approach reduces the financial impact of losses on any single policyholder and provides a safety net that is both cost-effective and beneficial for all involved. Essentially, this pooling effect allows for greater financial security and stability, making it easier for individuals to manage and mitigate risks in their lives.

The other options do not accurately represent the primary function of insurance. For instance, insurance does not completely eliminate risks, and while it can create some liabilities in terms of premiums owed, its main purpose is risk sharing, not increasing personal liabilities. Additionally, rather than restricting financial planning options, insurance often enhances it by providing a safety net that allows individuals to take calculated risks more confidently.