There are two basic kinds of life insurance policies: whole-life (cash value) and term insurance.

Whole-life policies (sometimes called permanent insurance) combine life insurance coverage with a savings element and cover you for your entire life. The premiums remain constant throughout your life, but are very expensive. The policy pays a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company. You can borrow against the cash accumulation fund without being taxed, but you must repay it or the amount will be deducted from your payout amount upon your death. You can also cancel the policy and recover the cash component, but the cancellation fees are enormous and can eliminate any cash value for as much as the first five years. You should expect the annual return on your cash value to be extremely small.

Universal life is a whole-life policy that combines term insurance with a money-market-type investment that pays a market rate of return. To get this somewhat higher return, these policies generally don't guarantee a certain rate. Because of their higher yield, sales of universal policies outpace those of whole life.

Variable life and variable universal life are whole-life policies with an investment fund tied to a stock or bond mutual-fund investment. Returns can be potentially higher, but are not guaranteed. In fact, when the market suffers a loss, so can the cash value portion of your policy.

The other type of coverage, which is much preferred for many reasons, is term insurance. This insurance is purely insurance protection, meaning it has no investment component. You're buying life coverage that lasts for a set period of time. Annual-renewable term (ART) is purchased year-by-year, although you don't have to requalify by showing evidence of good health each year. When you're very young, premiums for ART are really cheap but steadily increase every year as your get older. The more preferred type of term insurance protection is called "level-premium" term. It has somewhat higher but fixed premiums for longer periods of time, anywhere from 5 to 30 years.