If you obtain an insurance policy, what are you doing to the risk?

• A. Increasing the risk
• B. Eliminating the risk entirely
• C. Transferring the risk
• D. Redirecting the risk to the client

Answer: (C)

Taking out an insurance policy is a way to transfer risk to the insurer. By paying a premium, you shift the financial burden of certain potential losses from yourself to the insurance company. If a covered event occurs, the insurer pays for the losses up to the policy limits, so you’re protected against large out-of-pocket costs. The risk isn’t eliminated—there’s still the possibility of a loss—but the financial impact is borne by the insurer rather than you. This is different from eliminating risk altogether, increasing risk, or redirecting risk to someone else such as a client.