1. How Whole Life Insurance Works.

A whole life insurance policy has two fundamentals. The mortality charge is the part of your premium that pays for the insurance coverage. The investment component that earns interest is the second part.

Life insurance companies traditionally invest insurance premiums in bonds, stocks and real estate in order to generate raises in cash value for policyholders. Policyholders have no input into the investment process in a whole life insurance policy.

Life insurance companies may also credit the investment component with an annual dividend depending on the insurer's loss experience and investment performance.

2. How Term Life Insurance Works.

Life insurance that stays in effect for only a specified and limited time. If the insured person dies within that time the beneficiary receives the death payments. If the insured person survives, then the policy ends and the beneficiary receives nothing. Once the policy has expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end.

3. Benefits of whole life insurance over other types of life insurance.

* Savings are tax-deferred.

* Your premium will remain constant during the duration of coverage.

* A portion of your premium goes toward the policy's cash value.

4. Disadvantages of whole life insurance.

* Fixed premiums are more expensive than term premiums.

* Insurance salespeople may push these policies because of bigger commissions.

* It is a less attractive investment than other investment options.

5. Reviewing risk and lifestyle.

Insurance companies automatically divide people into two groups: smokers and nonsmokers. Within these two groups each person is broken down into one of three risk categories. The premium varies drastically depending on a person's category.

If you have a parent or sibling who had cancer or a heart attack before the age of 60 you might pay more due to his or her poor health. Statistically, you are more likely to die from one of these ailments than someone who has no family history of heart disease or cancer.

Insurance companies are just as interested in mental health as physical health. It could cost you if you are on an antidepressant. The insurance company worries that if you are depressed you may eventually take your life.

Insurance companies also worry that people with bad credit or a bankruptcy in their past might not pay their insurance premiums.

Insurance companies also care what you do in your spare time. Anything that is considered to be an extreme sport will force you to pay a higher premium. High risk hobbies may include mountain climbing, bike racing, scuba diving and flying a small plane. Check an Insurer's Ratings

6. Check an Insurer's Ratings.

The financial security of the insurer is of vital concern. Information on the credit worthiness of an insurance company is easy to obtain. Reports are cheap or free over the Internet. Go with an insurer rated A or better.