What are Vanishing Premiums?
Rather than being a type of life insurance, vanishing premium life insurance is a method of premium payment. It was used as a sales pitch for universal life insurance, and those selling these methods of payment said that the premiums would vanish in the future. Insurance agents and companies used the term to describe how premiums can be reduced over time or how they subsequently can “vanish”. The idea is that once the accumulated dividends reached a point where they were enough to pay the premiums, the policy will become self-perpetuating. Essentially, that means that when the dividends reach a certain level, they will carry on in covering the cost of the premiums for the length of the policy.
The agent will tell you that you initially have to place a large amount of money into a universal life policy. The money will be invested. If the company has a good year, the company may pay interest, and the percentage of interest could possibly be extremely high. If after a few years your interest and dividends have built up, it’s promising that you may have enough cash value in order to pay the premiums. This, the premiums will “vanish”.
Benefits and Risks
Some companies may possibly perform well and their profits will go up even faster than they initially projected. For this case, a person may request to have their policy fully paid at that point. If this happened, then you are indeed in possession of a vanishing premium policy.
Can a company ever guarantee that interest will go up and that your policy will ever be covered some day? A huge risk of purchasing such a policy is that insurance companies cannot guarantee their performance for the years to come. They can convince you that they are going to do good by showcasing their history, but they can never guarantee this. There’s a chance that they won’t be as successful as they originally hyped, and profits will go down. So, if they estimated that a vanishing premium policy would be paid up in a few years, they could be wrong. And projecting such a misconception would be considered fraud.
Start and End
During the early 1980s and up until the early 1990s, this process was popular in the high interest rate environment. It was said that permanent life insurance was more complex to sell because individuals alleged higher cost in premiums. In truth, over the same length of time, the cost of permanent life insurance was just about the same as annual renewable term insurance. Insurance agents needed a way to make premium payments seem more practical and attractive, which is why they came up with the idea of vanishing premiums.
The concept of vanishing premiums used to be popular. But, as time passed, it was exposed that the idea was unrealistic. Aside from that, projecting policy values in this way was tantamount to fraud. Technically, life insurance dividends are never guaranteed. Every life insurance agent knows that. In theory, vanishing premiums are a good idea. Aside from that, the concept is also very eye-catching for many other reasons. But today, it is considered unethical, and it is also established as illegal.