Life insurance companies are financial firms that insure the lives of individuals. Insurance companies are regulated at the state rather than the federal level and insurance companies and agents working for these companies have to obtain a state license before selling life insurance contracts to residents of a particular state.
Life insurance companies sell a variety of different contract types but a basic life insurance contract involves the insurance company having to make a payout to the beneficiaries of a contract when the person insured by the contract dies. Term-life contracts provide insurance for a certain number of years, whereas whole-life contracts provide insurance coverage for life. Some insurance contracts, including annuities and whole life insurance contracts, also provide living benefits for the insured such as the ability to make cash withdrawals of premiums and earnings on premiums.
Insurance companies raise money to cover life insurance payouts by requiring people who buy insurance to pay premiums. Insurance companies provide a certain level of coverage for each insured individual and raise funds to cover the cost of those payouts by charging premiums. Insurance companies use actuarial charts to estimate how long the average man or woman lives. Premiums charged are based on these estimates as the company has to raise enough money through premiums to both cover the anticipated payouts and make a profit.
Insurance companies do not typically have enough money on hand to cover the cost of paying out every life insurance contract at once so in theory if all of the insured died at one time, the insurance company could not afford to cover its obligations. To prevent consumers from losing money because of over-extended insurers becoming insolvent, insurance companies are insured by state insurance guaranty funds. Each company pays regular premiums into the fund and if a firm goes bankrupt, the fund provides some level of compensation to people who had insurance agreements in place with the failed firm.
Insurance companies employ both in-house agents to sell life insurance and allow independent agents to sell contracts to clients. Independent agents are not affiliated with one firm and sell policies for multiple insurers. Insurance companies are not required to offer insurance for everyone. State laws enable insurance companies to avoid having to make payouts in some situations such as when an insured person commits suicide within two years of buying a policy. However, state regulators must ensure that insurance companies abide by the terms of insurance contracts and investigate consumer complaints related to firms failing to honor the contract terms.