What is the primary purpose of insurance in personal finance?

What is the primary purpose of insurance in personal finance?

• A. To provide a guaranteed return on investments
• B. To protect against financial loss due to unforeseen events
• C. To increase a person's credit score
• D. To reduce taxable income

Answer: (B)

The primary purpose of insurance in personal finance is to protect against financial loss due to unforeseen events. Insurance serves as a safety net that helps individuals manage risk by providing financial support when unexpected incidents occur, such as accidents, illnesses, or damage to property. By paying a premium for insurance, individuals transfer the risk of significant financial loss to insurance companies, which can then offer compensation in the event of a claim. This mitigates the adverse impact that unforeseen events can have on a person's financial stability. The other options either focus on aspects related to investments, credit, or taxes that do not align with the core function of insurance. Investments aim for growth and returns, improving credit involves managing debts and payments rather than insurance, and while some insurance products may have tax benefits, insurance itself is primarily about risk management.

The primary purpose of insurance in personal finance is to protect against financial loss due to unforeseen events. Insurance serves as a safety net that helps individuals manage risk by providing financial support when unexpected incidents occur, such as accidents, illnesses, or damage to property. By paying a premium for insurance, individuals transfer the risk of significant financial loss to insurance companies, which can then offer compensation in the event of a claim. This mitigates the adverse impact that unforeseen events can have on a person's financial stability.

The other options either focus on aspects related to investments, credit, or taxes that do not align with the core function of insurance. Investments aim for growth and returns, improving credit involves managing debts and payments rather than insurance, and while some insurance products may have tax benefits, insurance itself is primarily about risk management.