What is the primary purpose of insurance in personal finance?

The primary purpose of insurance in personal finance is to protect against financial loss from unforeseen events. Insurance serves as a safety net that helps individuals and families manage risks that may lead to significant financial strain. For example, health insurance can cover medical expenses due to illness or injury, while homeowners insurance protects against damage to property. By paying regular premiums, policyholders can safeguard their finances from the potentially devastating consequences of accidents, natural disasters, or unexpected events, ensuring that they do not face overwhelming financial burdens when such situations arise. This protective function of insurance is crucial for maintaining financial stability and peace of mind in an unpredictable world.

Wealth accumulation, profitable investments, and encouraging spending are not the primary focuses of insurance; instead, they relate more to financial planning and investment strategies. Insurance is fundamentally about risk management, providing security and helping individuals mitigate the impact of unforeseen financial challenges.