Typically, in the US at least, the SCC State Corporation Commission (or other such agency) requires that an insurance company have "X" amount of dollars in reserve to pay out on claims as a safeguard. Naturally, this does not always work. The best example I can think of is when Hurricane Andrew swept through Florida and several smaller insurance companies became insolvent because there were so many claims. A lot of which were total losses on cars/property. The reserve amount just didn't cut it because of the magnitude of the event. Theoretically, the same could happen to a life insurance company if a number of policy holders were involved in a mass disaster (like the recent tsunami). Premiums are collected on policies and usually invested and/or held back in a reserve fund. Typically a policy holder will pay their premium for several years before a claim is made. They can pay out millions because they have collected enough in premium payments from everyone to do so. Let's say 1,000,000 people pay $1 a month for a policy. That's $12,000,000. But only 1 person dies and the payout is $1,000,000. This is a very basic example (very basic) but as you can see, the company still has $11,000,000 left even after paying that claim. It is highly improbable that all 1,000,000 premium paying policy holders will all die at once.

They take in more than they pay out. The reinvest the money as it comes in and make money off of money AND the also reinsurance meaning they sell off part of their risk to reinsurance companies.

That's why they have actuaries. These folks compute the statistics regarding whom to insure (aka "risk), so that the company makes money in the long run.