What is the primary benefit of purchasing insurance?

The primary benefit of purchasing insurance is to transfer a portion of your risk to the insurer. Insurance acts as a financial safety net that helps individuals and businesses manage potential financial losses from unforeseen events like accidents, illnesses, or natural disasters. By paying a premium to the insurance company, the policyholder receives coverage for certain risks, which means that instead of bearing the full financial burden of a loss, the insurer shares or takes on that risk.

This mechanism allows individuals to protect their finances and provides peace of mind, knowing that they will not be solely responsible for the costs that may arise from certain defined risks. Insurance is fundamentally about risk management, helping to stabilize an individual's or business's financial situation in the face of adversity, which is why the idea of risk transfer is such a cornerstone of insurance practices.

In contrast, retaining risk can lead to significant financial strain in the event of unexpected losses, and increasing personal financial liability or attempting to eliminate all financial loss risks is unrealistic in most scenarios. Insurance helps mitigate risk rather than completely eliminate it, making the transfer of risk to the insurer the most effective approach in managing potential financial impacts.