The first important decision you'll have to make when comparing types of life insurance is whether you’d like to opt for a term or whole life policy.
As the names of these policies indicate, a term policy is only meant to cover you for a certain period of time. Usually, this type of policy is purchased for a term of 20 to 30 years.
In contrast, a whole life policy is meant to protect you for the duration of your life. In addition, a whole life policy has what's known as a cash value. This means that some of the money you pay into the policy every month is saved or invested, so you're able to cash it out or borrow against it if you'd like.
Whole life insurance is often referred to as a hybrid product – a blend between insurance and a savings or investment vehicle.
There are three basic types of whole life insurance:
1. Universal. Universal life insurance is the most basic type of whole life insurance, in which some of the premium paid by the purchaser goes toward a death benefit (to be used in the event that the purchaser dies) and some of the premium goes toward savings or a very safe investment.
2. Variable Life. Variable life insurance is more investment than insurance because most of the premium paid goes toward an investment in the insurance company's fund. This is considered a somewhat riskier insurance choice because death benefits can be impacted by investment returns. If you want a guaranteed death benefit, you'll have to pay more toward your premium.
3. Variable Universal. This type of whole life insurance is a blend between universal and variable life insurance. It offers a guaranteed death benefit in most cases, but the portion of the premium that's not going toward the death benefit can be invested as the purchaser sees fit (within the confines of the insurance company's investment choices). This makes it more flexible than typical universal policies, but safer than typical variable life policies.
So is whole life insurance right for you? As with nearly all financial products, there are benefits of this decision as well as some drawbacks.
Benefits of choosing whole life insurance:
Drawbacks of choosing whole life insurance:
Neda Jafarzadeh is a financial analyst for NerdWallet. NerdWallet is a financial literacy website committed to helping consumers make better financial decisions with issues ranging from finding affordable health care, to finding the best online brokerage accounts for their investments.