International Baccalaureate (IB) Practice Exam

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What is the primary purpose of insurance?

Provide an investment opportunity
Develop a savings plan
Transfer financial risk
All of the above

The correct answer is: Transfer financial risk

The primary purpose of insurance is to transfer financial risk. Insurance operates on the principle of risk management, where individuals or businesses pay a premium to protect themselves from potential financial losses due to unforeseen events, such as accidents, illnesses, or property damage. By pooling together resources from many insured parties, insurance companies can spread the risk and provide compensation to those who suffer losses. This mechanism allows individuals to safeguard their financial well-being against various uncertainties without bearing the full cost of those risks themselves. While the other options might involve aspects related to insurance, they do not encompass its primary goal. Insurance is not fundamentally about providing investment opportunities or developing savings plans; these might be secondary benefits or by-products but do not define its essential function. The focus is squarely on risk transfer, making it crucial for managing financial security and peace of mind in the face of unpredictable events.