Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Purchasing a life insurance policy is best described as applying which risk management technique?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Insurance is the classic example of risk transfer: the financial consequences of a possible loss are shifted from the individual to the insurer in exchange for a premium. The insurer can absorb the transferred exposure because it pools many similar risks, which makes the group's losses predictable under the law of large numbers. Transferring the risk does not eliminate the possibility of death; it only shifts the financial burden of the loss.
Why the other options are wrong
- B) Avoidance means refusing to engage in the activity at all, such as never flying to avoid aviation risk; buying insurance keeps the exposure in place.
- C) Retention means keeping the risk and paying for losses out of pocket, which is the opposite of shifting the risk to an insurer.
- D) Sharing spreads risk among parties who all remain exposed, whereas insurance transfers the risk away from the insured to the insurer.
Memory hook
Insurance hands the risk to the insurer. Avoid it, keep it, or share it — insurance is transfer, plain and simple.