Which of the following is a potential cost of choosing not to purchase insurance?

• A. Paying regular premiums to an insurance company
• B. Receiving compensation for covered losses
• C. Reducing the risk of adverse selection in insurance markets
• D. Facing large financial losses in the event of an unexpected accident or illness

Answer: (D)

Verified step by step guidance

1. Understand the concept of insurance: Insurance is a financial product that helps individuals or businesses manage risk by paying regular premiums in exchange for compensation in case of covered losses.
2. Identify the costs and benefits of purchasing insurance: The cost includes paying regular premiums, while the benefit is receiving compensation for losses, which reduces financial uncertainty.
3. Recognize what happens when insurance is not purchased: Without insurance, the individual or business does not pay premiums but faces the full financial burden if an unexpected event, such as an accident or illness, occurs.
4. Analyze the options given: Paying premiums and receiving compensation are related to having insurance, while reducing adverse selection is a market-level effect, not a direct cost to the individual.
5. Conclude that the potential cost of not purchasing insurance is the risk of facing large financial losses when unexpected events happen, as there is no compensation to offset those losses.