California Life and Health Insurance Practice Exam

Which of the following would NOT be achieved by purchasing an insurance policy?

1. Risk is minimized

2. Risk is transferred

3. Risk is eliminated

4. Risk is shared

The correct answer is: Risk is eliminated

Purchasing an insurance policy is intended to provide financial protection against potential losses, but it does not eliminate risk altogether. Instead, the primary functions of insurance are to manage risk through strategies such as minimizing, transferring, and sharing it among a wider group of policyholders. When insurance is purchased, risk is transferred from the individual to the insurance company. This means that the financial burden of a loss is shifted to the insurer. The risk is also shared collectively among all policyholders, as premiums collected from many individuals contribute to a pool that covers the losses of a few. This collective approach helps spread the risk. However, risk can never be completely eliminated. There are always uncertainties associated with life and health, meaning that while insurance can mitigate potential financial impacts, it does not remove the underlying risks themselves. Hence, the concept that a policy would eliminate risk is incorrect, making it clear why the option highlighting risk elimination is not achievable through insurance.