A wage earner buys life insurance so that, if the wage earner dies, the family receives a lump sum to replace lost income. This use of insurance is best described as:

Why A is correct

Risk transfer means shifting the financial consequences of a loss to another party — here the insurer — in exchange for a premium. Life insurance transfers the economic risk of premature death, the family's dependence on the insured's future earnings, from the family to the insurer. Avoidance means not engaging in the exposure at all; retention means bearing the loss personally; reduction means lowering loss frequency or severity. Because the financial burden of the insured's death is shifted to the insurer, this is transfer (CIC §22).

Why the other options are wrong

• B) Avoidance means eliminating the exposure altogether, for example refusing to engage in a risky activity. Buying life insurance does not eliminate death; it merely shifts the financial consequences of death to the insurer.
• C) Retention means absorbing the financial loss yourself, as with a deductible or self-insurance. Purchasing life insurance is the opposite: the insured shifts the risk to the insurer instead of keeping it.
• D) Reduction lowers the frequency or severity of losses, such as installing smoke detectors. Life insurance does not reduce the chance of death; it transfers the economic impact of death to the insurer.

Memory hook

Insurance = a premium now to push the pain of loss onto the insurer. That is transfer.