What is one benefit of insurance in managing financial risk?

One significant benefit of insurance in managing financial risk is that it effectively transfers risk from one party to another. When an individual or business purchases insurance, they are transferring the potential financial burden of a loss to the insurance company. This means that instead of bearing the full impact of a financial setback—such as damage to property, medical expenses, or liability costs—policyholders can rely on their insurance coverage to help mitigate those risks.

This risk transfer is crucial because it provides peace of mind, allowing individuals and businesses to operate without the constant fear of catastrophic financial loss. By paying a relatively small premium, the insured gains protection against much larger potential losses, fostering stability and confidence in their financial planning.

The other options do not accurately reflect the nature of insurance. For instance, insurance does not eliminate all risks; it only manages and mitigates them. It does not guarantee financial gain, as insurance is primarily a protective mechanism rather than an investment. Additionally, insurance requires payment of premiums, which is the cost of the coverage being provided. Thus, the transfer of risk is the central function of insurance that provides significant benefits in financial risk management.