In the risk management process, an individual who purchases a life insurance policy has most directly engaged in:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Risk transfer shifts the financial burden of a potential loss to another party, the insurer, in exchange for a premium. When a person buys life insurance, the financial risk of premature death is transferred from the family or business to the insurer, which pools many similar exposures and relies on the law of large numbers to predict claims. Avoidance means eliminating the exposure entirely, such as refusing to fly. Retention means keeping the risk and paying losses out of pocket. Reduction means lowering the chance or severity of loss through prevention. Insurance is the classic risk-transfer technique, with an element of risk sharing through pooling.
Why the other options are wrong
- B) Risk avoidance eliminates the exposure altogether by not engaging in the activity; buying insurance assumes the exposure exists and simply moves the financial consequences to another party. Avoidance would mean never having the risk in the first place, which is a different strategy from transferring a present risk.
- C) Risk retention means absorbing losses personally, which is the opposite of handing the risk to an insurer; retention is typically chosen only for small or affordable losses. Buying a policy is the clearest example of transfer rather than retention.
- D) Risk reduction, such as wearing seat belts or installing smoke alarms, makes losses less likely; insurance does not change the probability of loss, it only finances the consequences. Loss prevention and insurance are complementary but distinct risk management techniques.
Memory hook
Insurance is the pass: hand the financial risk to the insurer and pay a ticket price.