South Carolina Life Insurance Practice Exam

What is the primary purpose of insurance?

1. To create wealth

2. To transfer risk

3. To provide loans

4. To invest funds

The correct answer is: To transfer risk

The primary purpose of insurance is to transfer risk. This concept lies at the heart of how insurance operates. Individuals or entities face various risks, such as the risk of illness, accidents, or damage to property. By purchasing insurance, they effectively transfer the financial burden of certain risks to the insurance company. This risk transfer allows policyholders to have peace of mind knowing that if a covered event occurs, the insurance company will provide financial support or compensation, thereby mitigating the potential impact of that risk on their personal or financial situation. It enables people to share risks collectively, spreading out the potential costs among a larger group, which makes it manageable for individuals and businesses alike. In contrast, while insurance may sometimes facilitate investments or offer loans through specific products (like whole life insurance policies that build cash value), these activities are secondary functions. The essence of insurance remains in risk management and protection, making risk transfer the foundation of the insurance industry.