South Carolina Life Insurance Practice Exam

What is the primary purpose of an insurance policy?

1. To invest savings

2. To provide a legal contract for claims

3. To serve as a tax shelter

4. To encourage savings behavior

The correct answer is: To provide a legal contract for claims

The primary purpose of an insurance policy is to provide a legal contract that outlines the terms under which a claim can be made and processed. This contract specifies the obligations and rights of both the insurer and the insured, detailing coverage amounts, exclusions, and conditions under which a claim can be filed. It offers legal protection and guarantees that the insured will receive a payout or benefit in the event of a covered loss, which is essential for mitigating financial risks associated with unforeseen events. While investing savings, serving as a tax shelter, and encouraging savings behavior may be benefits or features related to certain financial products, they are not the primary functions of a traditional insurance policy. The core objective remains the provision of security and protection against potential financial hardship caused by risks such as death, illness, or property loss.