First, how does life insurance work?
Life insurance is a contract between you and an insurance company. Under this arrangement, the insurance company agrees to pay your beneficiaries a specific amount of money when you die. In return, you agree to pay a premium—either as regular payments or as a lump sum. Remember, any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
The insurance companies have developed a number of variations on this arrangement, but it forms the basis of all insurance policies.