Dear Insurance Adviser,
In my early 20s, I bought a 20-year term life insurance policy and then converted it to permanent whole life insurance around age 28. When I converted it, I believed the policy was a whole life policy with a term rider. After getting a better understanding of the pros and cons of the whole life policy, it is looking like it is better for me to go back to term, as I could invest some of the money elsewhere. Are there any limitations or gotchas when converting from whole life to term? What happens to the cash value (assuming I have any) upon conversion? I am now 35.
— Term-inator

Dear Term-inator,
You say that you bought a 20-year term policy in your early 20s. I’m going to assume then that you are married and have a family. Otherwise, buying life insurance with no one dependent upon you financially is as big a mistake as buying car insurance before you own a car!

Generally, if you have a young family, you’re better off sticking with level term life insurance. For the same coverage at a young age, whole life or permanent life insurance costs five to 10 times more than term life insurance. The advantage of whole life insurance is that you overpay in the early years, so your premium stays level and more affordable in your later years.

The problem I have with young families purchasing whole life insurance is that, because of the high cost, they almost always wind up underinsured. Believe me when I tell you that your surviving spouse and children are not going to care what kind of life insurance you had. They are only going to care about how much life insurance you had. So buy term life insurance. Buy a lot more than you currently have. At least seven to 10 times the combined income of you and your spouse.

There is no such thing as converting from whole life to term life insurance. To reverse the process, you will have to apply for a new term insurance policy. Needless to say, don’t drop your current policy until you have been approved for coverage by the new insurer.

All the best.

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