Washington State Insurance Practice Exam

What is the primary purpose of insurance?

1. To provide financial protection against losses

2. To increase personal wealth

3. To meet legal requirements

4. To offer investment opportunities

The correct answer is: To provide financial protection against losses

The primary purpose of insurance is to provide financial protection against losses. Insurance serves as a risk management tool that individuals and businesses utilize to safeguard themselves from unforeseen events that could lead to significant financial hardship. When a policyholder pays premiums, they transfer the risk of loss to the insurance company. In the event of a covered incident—such as an accident, theft, or natural disaster—the insurer compensates the insured for their losses, thereby lessening the financial impact of those events. While other choices may contain elements that are relevant to the broader scope of financial planning or legal considerations, they do not capture the primary role of insurance. Increasing personal wealth, for example, is more aligned with investment strategies rather than the foundational purpose of an insurance policy. Similarly, while meeting legal requirements can be a consideration for certain types of insurance (like auto insurance), it does not define the primary function of insurance as a whole. Lastly, investment opportunities might pertain to specific financial products or vehicles, but insurance itself is chiefly concerned with protection against loss rather than generating wealth. Thus, the main focus remains on the financial security that insurance provides against various risks.