What is a primary reason for having insurance in a financial plan?

Having insurance as a primary component of a financial plan is fundamentally about managing potential risks and losses. Insurance serves as a protective mechanism that allows individuals or businesses to hedge against unforeseen events that could lead to significant financial hardship. For instance, life insurance provides financial support to beneficiaries in the event of the policyholder's death, while health insurance can cover medical expenses arising from unexpected illnesses or accidents. By transferring the risk of financial loss to the insurance company, individuals can focus on other aspects of their financial planning without the overwhelming burden of potential large, unexpected costs.

The focus on risk management through insurance helps ensure that individuals can recover from adverse events without jeopardizing their long-term financial stability. In this way, insurance not only protects an individual's current financial resources but also preserves their future earning potential, enabling them to work toward their financial goals with a sense of security.