Colorado Life Producer License Practice Test

What is the primary function of insurance?

1. To provide financial rewards for investments

2. To transfer the risk of loss

3. To eliminate all financial risks

4. To offer savings accounts for consumers

The correct answer is: To transfer the risk of loss

The primary function of insurance is to transfer the risk of loss from an individual or entity to an insurance company. By purchasing insurance, the policyholder effectively shares the financial burden of potential losses with the insurer. This risk transfer allows individuals to protect themselves against unforeseen events such as accidents, illnesses, or property damage, which could otherwise lead to significant financial hardship. In a situation where a covered event occurs, the insurer compensates the policyholder based on the terms and coverage limits outlined in the policy. This mechanism provides peace of mind, knowing that while some risks remain, the financial impact of a major loss can be mitigated through the insurance policy. The other options mentioned do not accurately portray the core purpose of insurance. For example, while financial rewards for investments and savings accounts may be associated with some financial products, these are not within the scope of insurance. Similarly, insurance cannot eliminate all financial risks; it can only manage and mitigate specific risks through the pooling of resources and risk-sharing among policyholders.