The 5 types of life insurance: Which is right for you?

Life insurance can protect your family's financial future if you're not there to provide for them. It can be hard to understand how it works or which policy type best serves your needs.

Learn more about the different kinds of life insurance, which is right for you and how to shop for a plan.

In its most basic form, life insurance is a contract with an insurance company that provides a payout to a named beneficiary if the policyholder dies under covered circumstances. In exchange, premiums are paid either monthly, quarterly, semi-annually or annually.

The payout, called a death benefit, can help the beneficiary with daily living, the cost of a funeral or large expenses like a mortgage or a child's college education.

A life insurance policy may pay out to the policyholder while they are still alive, like if they are diagnosed with a critical illness or need long-term care. These benefits are usually endorsements that cost extra.

Besides a death benefit, some policies pay dividends or accrue a cash value that the policyholder can use to pay premiums, increase their coverage or take as cash.

Life insurance is usually either term life, which expires after a set timeframe, or permanent life, which lasts as long as you keep paying premiums. Permanent life insurance can also be broken into two subcategories, whole life and universal life.

Typically the most affordable kind of policy, term life insurance covers you for a set term, usually 10, 20 or 30 years. If you die before the term ends, your beneficiary receives the stated death benefit. If you outlive the term, there is no payout.

There are several types of term life insurance:

• Level term policy: Your premiums and death benefit stay the same for the length of your term.
• Renewable term policy: Can be renewed at the end of each term, usually up to a certain age. Rates may go up with every renewal.
• Return of premium policy: If you outlive your term, you can receive some or all of your premiums back. Typically there is an added cost for this benefit.

We tapped Guardian as a top choice for term life because it can convert to a permanent policy without another medical exam. Another favorite, Bestow, skips the exam altogether and offers up to $1.5 million in coverage.

Like term life, whole life insurance policies have a fixed monthly premium and a guaranteed death benefit. But they also have a cash value component, which can be used while you're still alive to pay premiums, withdraw or borrow against.

A whole life policy remains in force as long as you continue to pay your premiums. While this is often referred to as "permanent life insurance," it's really just guaranteed to an advanced age, anywhere from 90 to 121. If you outlive the age on your policy and don't file for an extension, you'll be paid your death benefit. (You may also receive your cash value component, depending on the insurer.)

Because it doesn't expire and can earn cash value, whole life is more expensive: You could pay anywhere from 5 to 15 times more than a term life policy with the same death benefit.

And because whole life insurance is more complex, you usually need to work with a broker or advisor to buy a policy rather than just enroll online.

MassMutual is one of our top picks for whole life, offering many riders to customize your coverage.

Another type of permanent coverage, universal life insurance allows you to adjust your premiums while still building cash value and keeping a death benefit in place.

There are three types of universal life insurance:

• Universal life insurance (UL): Cash value component earns interest with flexible payments.
• Indexed universal life (IUL): Cash value growth is tied to a market index like the S&P 500 within top and bottom limits.
• Variable universal life (VUL): Funds from the cash value component are invested in the stock market.
• Guaranteed universal life (GUL): A more affordable option with a fixed death benefit but little or no cash value.

Pacific Life offers UL, IUL and VUL policies, with a wide variety of investment options. Protective offers guaranteed universal life insurance policies with a return of premium rider at no additional cost.

If your interest in life insurance is making sure your loved ones aren't burdened with paying for your funeral and other end-of-life expenses, a final expense or burial insurance policy may be the right fit.

Final expense insurance usually offers up to $25,000 to pay for a funeral and burial, medical bills and other expenses.

It's often a guaranteed acceptance policy with no medical exam and fixed premiums. That's the case with AARP, which has final expense policies for up to $30,000 underwritten by New York Life.

Many companies offer free life insurance to their employees, known as group life insurance. While it can be a good start, group life is usually not enough if you have people who depend on your income. The payout can be just one or two times your annual salary — nowhere near the ten times most experts advise buying.

And when you leave the job, the policy terminates.

It may be possible to buy more coverage through your employer. This supplemental insurance can be a good option if you'd have trouble qualifying otherwise, but if you're young and healthy it may be more expensive than buying a standalone policy.

How much life insurance you need depends largely on your age, your income and your goals. Experts often suggest buying enough insurance to pay out ten times your annual salary.

Someone earning $75,000, for example, should get at least $750,000 worth of coverage.

Another strategy for estimating how much insurance you need is the DIME method: This involves adding up any debts you'd leave behind, the income you'd no longer provide, the remainder of your mortgage and any education expenses you expect your children to need.

If your goal with life insurance is to pay for final expenses, generate income or leave a financial legacy, you may need a different amount of coverage. Talk to a financial advisor or insurance agent about your options.

Ask yourself some questions, including:

• What's your budget? How much can you reasonably afford each month? If it's not much, term life insurance could be the right choice to protect your loved ones during your highest earning years.
• What are your major expenses? Do you have another 20 years on your mortgage and three kids to put through college? Make sure you buy enough coverage to help cover those expenses,
• What's your family situation? Do you have children? Are they very young or nearly out of the house? Do they have special needs that could mean they rely on you indefinitely? If so, a permanent policy might be a better fit.
• What's your goal? If you want to protect your family if they lose your income, a term policy might cut it. If your goal is to build an inheritance for them or a charity, a universal policy might be a better fit.
• What's your health status? If you're older or have pre-existing health issues, a plan with no medical exam, like a final expense policy, could be the best option.

Since you're committing to this policy for decades, picking the right insurer and policy is important. Here are factors to consider.

1. Choose the policy type you want

Decide whether you want a term, whole life or universal life policy. If it's one of the latter two, you'll need to work with a broker or financial advisor.

2. Decide how much coverage you want

You can get a rough estimate by multiplying your salary by 10, but there are a lot of variables to consider — including your age, your health, the size of your family and your goals for the payout.

3. Get quotes from several insurers

If you're shopping for a term life policy, you should be able to get quotes from insurers online and compare their offerings.

If you're looking for a permanent insurance policy, enlisting a broker could help since rates for these policies aren't available online.

4. Complete the application

Once you have enough information to make a choice, you'll complete the insurance company's application. You'll need to provide your personal information, as well as details about your lifestyle, finances, occupation and personal and family medical history. Your driving record, travel plans and even your credit score may also be used to determine your rates.

5. Undergo a medical exam

You may be required to undergo a medical exam to determine your health status. Usually, the insurance company will pay for someone to come to your home or office to collect data and blood samples. (If you're unable or unwilling to undergo an exam, there are some no-exam life insurance policies.)

6. Purchase your policy

If you're approved, you'll sign the policy documents, make your first premium payment and choose your beneficiaries. This person should be able to manage the money themselves, so if you want a minor child to receive your death benefit you may want to name your spouse or an alternative guardian as the beneficiary.

Life insurance policies typically come with a look period to give you time to read the fine print and get a refund if you're not satisfied. This period varies by state but is typically 10 to 30 days.

Life insurance makes the most sense if you have people who rely on your income for daily expenses or large debts like a mortgage or college education.

It can also be worth it to pay for medical care if you're facing a terminal or long-term illness, to cover the cost of a funeral or other end-of-life expenses, or even as an investment tool or to finance a loan.

Ultimately, whether life insurance makes sense depends on a variety of factors — including your income, age, dependents and goals. Talk with your family and a financial expert to get a clearer idea of what kind of coverage makes the most sense.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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