Life & Health Insurance Practice Exam 2025 - Free Practice Questions and Study Guide

The primary purpose of an insurance contract is to indemnify parties against losses. Indemnification refers to the process of compensation for loss or damage, which is a fundamental principle of insurance. When individuals or businesses purchase insurance, they are effectively transferring the financial risk associated with potential losses to the insurer. In the event of a covered loss, the insurance company pays out to the insured, helping to restore them to their financial position prior to the loss occurring. This crucial function provides peace of mind and financial protection, allowing individuals and businesses to operate without the constant fear of significant financial setback due to unforeseen events.

Generating profit for the insurer, allocating risk among insured parties, and encouraging saving and investment are important aspects of the insurance industry but are secondary to the core purpose of indemnifying against losses. Profit generation is a necessary function to sustain the insurer's operations, while risk allocation is part of how insurance works but does not represent its primary purpose. Additionally, encouraging saving and investment may be relevant in the context of certain products like whole life insurance, but it does not encompass the essential purpose of all insurance contracts.