South Carolina Life Insurance Practice Exam

What is the primary purpose of an insurance policy?

1. To generate investment income

2. To provide financial protection against loss

3. To accumulate cash value

4. To fund retirement

The correct answer is: To provide financial protection against loss

The primary purpose of an insurance policy is to provide financial protection against loss. Insurance is designed to mitigate risk by offering a safety net to policyholders. When an insured event occurs, such as death, injury, or damage to property, the insurance policy ensures that the policyholder or their beneficiaries receive a payout that can help cover expenses and losses incurred. This principle of risk transfer is fundamental to the function of all types of insurance, including life, health, and property insurance. While generating investment income, accumulating cash value, and funding retirement can be outcomes associated with certain types of policies, particularly permanent life insurance, these are secondary benefits rather than the primary purpose of an insurance policy. The main goal remains to safeguard against potential financial hardship due to unforeseen events.