What is the main purpose of an insurance policy?

The main purpose of an insurance policy is to provide financial protection against unexpected losses. Insurance policies are designed to help individuals and businesses manage risk by transferring the potential financial burden of a loss to an insurance company. In the event of an unforeseen incident, such as an accident, theft, or natural disaster, the policy ensures that the policyholder receives compensation or coverage for the incurred losses, thereby allowing them to recover without suffering severe financial hardship.

This protective function is foundational to the concept of insurance, which is based on the pooling of risk among many policyholders. The insurance premiums collected are used to pay for claims made by those who need assistance after experiencing a loss. Through this mechanism, insurance serves as a financial safety net, ensuring that policyholders can maintain their economic stability despite unexpected events.