Final answer:
The incontestable clause in life insurance serves to protect beneficiaries from financial loss if an insurer refuses to honor the policy after a certain period. Insurance allows policyholders to financially protect themselves against covered events and can include options for borrowing against policies. Government-mandated insurance seeks to reduce moral hazard and adverse selection in the industry.
Step-by-step explanation:
The primary reason for the incontestable clause in life insurance policies is to provide a level of certainty to the beneficiary. This clause ensures that after a certain period, the insurance company cannot dispute the policy's validity based on misstatements by the insured, except in cases of fraud. It's a form of a money-back guarantee that protects the beneficiaries from financial loss if the insurance company refuses to meet the terms of the policy after the incontestability period has lapsed.
Insurance serves as a method to protect individuals from financial loss by having policyholders make regular payments, and in return, the insurer agrees to cover significant financial damages from events included in the policy. This coverage can sometimes include a loan option, whereby policyholders may borrow from the insurance company with the obligation to pay back the loan plus interest. Government regulations can also compel individuals to purchase insurance to spread risk across a larger pool, reducing the moral hazard and avoiding adverse selection, although insurers may not always sell to high-risk individuals.