A family purchases life insurance so that, if the breadwinner dies, the insurer bears the financial burden of the lost income. This is best described as which risk management technique?

Why C is correct

Transfer shifts the financial consequences of a risk to another party. When a family buys life insurance, the risk of premature death is transferred to the insurer in exchange for a premium, so the insurer pays the loss if it occurs. This is the same technique that underlies most insurance purchases and is one of the four principal risk management methods used in personal financial planning. Avoidance means refusing to accept the risk at all, retention means keeping the risk and funding losses yourself, and reduction lowers the chance or severity of a loss.

Why the other options are wrong

• A) Avoidance would mean eliminating the exposure entirely, such as deciding never to fly; buying life insurance does not avoid the risk of death and therefore is not avoidance.
• B) Retention is self-funding losses, as with a high deductible or a self-insurance fund; purchasing insurance is the opposite of retaining the risk.
• D) Reduction lowers loss frequency or severity through measures such as seat belts or smoke alarms; insurance does not reduce the chance of death, only its financial burden.

Memory hook

Transfer = hand the bill to the insurer. Avoid = dodge the risk. Retain = eat the loss yourself.