How does the concept of insurance function to protect individuals?

The concept of insurance primarily functions to protect individuals by spreading financial risk among many insured individuals. This principle is known as risk pooling, where multiple policyholders contribute to a collective fund. When an unforeseen event occurs, such as an accident or natural disaster, the financial burden is shared among all members of the pool rather than falling on one individual alone.

This method allows for more manageable financial protection for everyone involved, as the premiums collected from a large number of policyholders help cover the losses that affect a smaller group. Therefore, individuals can feel secure knowing that they are part of a system that mitigates the financial impact of unexpected events.

The other options do not accurately reflect how insurance operates. For example, insurance does not eliminate all forms of risk; it manages risk by providing financial support while still accepting that some level of risk exists. Additionally, insurance does not provide unlimited compensation for losses, as policies typically have limits on payouts. Finally, while insurance aims to approve legitimate claims, not every claim is guaranteed approval, as they must meet specific criteria and conditions outlined in the policy.