What are vanishing premiums?
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Asked June 8, 2010
Vanishing premiums are a concept that is not used much anymore in life insurance, although the practice is still in use. The idea is that you make an initial large payment in a life insurance account, and that over time the amount of your premiums decreases based on the performance of the account investments. A variation on this would be where you make larger than normal payments over a course of years in order to establish the base fund to pay your premiums.
Life insurance companies are not permitted to sell policies based on vanishing premiums any longer, because of the potential for the investments to perform poorly, reducing or eliminating the future benefit of the paid premiums. Many insurance companies still provide you with policies that have the potential to generate lower premiums, or even to build cash value designed expressly to pay future premiums, but they cannot promoted solely on the concept of gaining in value.
In order for your premiums to vanish in a relatively short period of time, not only did you have to have a high yield policy, the investments had to perform exceptionally well and you had to let the cash value accumulate without touching it. This made it impossible to guarantee that your premiums would vanish completely and therefore misleading to promote the product in that manner.
Instead, you can use a system where you make higher premium payments, or arrange for arbitrary contributions to the policy cash value. By expressly building the cash value, you can accumulate enough value to pay your premiums during your golden years, or if you should become disabled. This method is almost the same as using vanishing premiums, except that you are knowingly making an additional contribution for that purpose.
Answered August 7, 2013 by Anonymous
The term "vanishing premiums" is applied to certain types of whole life insurance policy. The principle is simple and involves nothing more than having a properly invested insurance portfolio. Before you sign on a vanishing premium policy, though, you should be aware that it may take years for the premiums to go away completely, if they ever do at all.
The way this type of policy works, your premiums are invested into mutual funds or other dividend paying accounts. As the interest and dividends increase, your monthly premiums will decrease until such time as the policy is effectively paying for itself. Once your life insurance premiums are self-funded, your premiums vanish until such time as the mutual funds drop below the current value or you borrow against the cash value of the policy to the point where the dividends are no longer sufficient to make the premium payments.
The problem with a vanishing premium is that it is a rare occurrence. If the markets could be counted on to rise steadily, this plan would work, but markets are volatile, and your premiums are going to fluctuate to reflect this. In most cases, there are other forms of whole life insurance that can reduce or eliminate the premiums with the additional benefit of being able to recoup earnings higher than your premiums, or allow you to borrow against the policy without penalties.
Answered June 8, 2010 by Anonymous