Final answer:
Insurance is a financial tool that protects against potential losses or liabilities from unforeseen events. Policyholders pay premiums to an insurance pool, which is then used to cover the expenses of those who experience covered incidents.
Step-by-step explanation:
True. Insurance does protect you against potential financial losses or liability that result from unexpected events. It operates on the principle of shared risk. Households and firms pay regular premiums to an insurance company, which creates a pool of money.
This pool is then used to reimburse those who suffer covered losses due to certain specified events. Insurers calculate premiums based on the probability of an event occurring among a group of policyholders. Due to imperfect information, exact outcomes cannot be predicted.
Factors such as personal characteristics and lifestyle choices influence individual risks. Insurance companies must therefore assess risk, even when this information is not perfect, to determine how much premium to charge each policyholder.
In summary, the unpredictability of events and the difficulty in assessing individual risk make insurance a vital tool to mitigate financial impacts caused by accidents, illnesses, theft, and other unforeseen occurrences.