What is the purpose of insurance in personal finance?

The purpose of insurance in personal finance is to protect against unforeseen financial losses. This means that insurance serves as a risk management tool, helping individuals and families mitigate the financial impact of unexpected events such as accidents, illnesses, property damage, or liability claims. When you purchase insurance, you pay a premium in exchange for coverage that can provide financial support when these unexpected events occur.

This protection is crucial because it ensures that a significant financial burden does not fall upon individuals in times of crisis, allowing them to maintain their financial stability. For instance, health insurance can cover medical expenses, home insurance can protect against damage to property, and auto insurance can provide financial assistance in the event of a car accident.

Other options, such as saving for future expenses, investing in the stock market, and providing loans, do not directly relate to the primary function of insurance as a protective financial measure. While they may play important roles in an individual's broader financial strategy, they do not provide the same risk management and loss prevention features that insurance specifically offers.