What do the terms ‘vanishing’ and ‘churning’ premiums mean?

UPDATED: Aug 2, 2010

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UPDATED: Aug 2, 2010Fact Checked

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Asked August 2, 2010

1 Answer

First let's look at a vanishing premium, which involves taking out an original policy. The concept of a vanishing premium is that the investment returns on your premium payments will be sufficient to cover the cost of future premiums. In effect, you make payments for limited time and the policy becomes self-supporting. In reality, this method can work, but only if you are willing to invest an additional value up front, such as paying the first 5 year's premiums at the time of signing the policy. Even then, the fluctuations of the market may make a vanishing premium impossible, but can reduce your annual costs. The trade-offs for a vanishing premium are higher initial premiums which diminish slowly but rarely disappear completely.

Churning is a term used to describe an insurance agent making a quick turnover at the expense of a client. The agent offers lower premiums or increased matured value over an existing policy, and you sell the existing policy in exchange for taking out a new policy with the new terms. On the surface this looks like a profitable idea, but the reality is that you lose all accrued value in your insurance policy and must start over from square one. The only gain in the transaction is for the agent who earns a commission against policies sold. The policyholder and insurance companies rarely see any benefit in such a policy conversion.

Answered August 2, 2010 by Anonymous

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