Which term describes a guarantee of compensation for specified losses in return for payment of a premium?

Which term describes a guarantee of compensation for specified losses in return for payment of a premium?

• A. Warranty
• B. Assurance
• C. Insurance
• D. Bond

Answer: (C)

This describes a contract where you transfer your financial risk to an insurer in exchange for a premium, and the insurer promises to compensate you for losses that fall under the policy. That is insurance. It is built on indemnity and risk pooling, covering specified perils up to policy limits in return for the premium you pay. Warranties are guarantees about a product’s quality or performance from the manufacturer. Assurance is a broader term often used for guarantees about future events, such as life-length guarantees, but not the general mechanism of protecting against financial loss in exchange for a premium. A bond is a debt instrument representing a promise to repay borrowed money, not a system of compensating losses for insured events. For example, car insurance pays for damages to your car or liability claims after a covered incident if you’ve paid the premium and the loss falls within the policy terms. This payout structure—compensation for covered losses in exchange for a premium—defines insurance.

This describes a contract where you transfer your financial risk to an insurer in exchange for a premium, and the insurer promises to compensate you for losses that fall under the policy. That is insurance. It is built on indemnity and risk pooling, covering specified perils up to policy limits in return for the premium you pay.

Warranties are guarantees about a product’s quality or performance from the manufacturer. Assurance is a broader term often used for guarantees about future events, such as life-length guarantees, but not the general mechanism of protecting against financial loss in exchange for a premium. A bond is a debt instrument representing a promise to repay borrowed money, not a system of compensating losses for insured events.

For example, car insurance pays for damages to your car or liability claims after a covered incident if you’ve paid the premium and the loss falls within the policy terms. This payout structure—compensation for covered losses in exchange for a premium—defines insurance.