What are vanishing premiums?

Answer

Before it was made illegal, some insurance agents used a sales pitch for universal life insurance that suggested the premiums could vanish.

The pitch went like this:

You start out by putting a large, lump sum into the universal life policy. The policy has the potential for making money — much like an investment (but it is illegal for an agent to sell life insurance by calling it an investment). The company may pay interest, if the company has a good year. If the company does have a good year, the percentage of interest could be very high. If you left the interest and dividends in your policy to build up with your cash value after a few years, you could have enough cash value in the policy to pay the premiums.

This scenario is possible, but not guaranteed, and perhaps not even probable.

The "vanishing premiums" scenario depends on three big "IFs:"

Only if the company has very good years. Only if the company pays high dividends. Only if you do not withdraw cash value.

Answer

As Chris indicated, vanishing premiums are not legal to sell, mainly because they aren't really vanishing.

The type of policy that was commonly utilized was not a Universal Life policy, but actually a Traditional Whole Life policy. These insurance policies paid dividends whereas Universal Life policies only have an interest bearing account. The dividends were essentially used to pay the future premiums if and only if they were large enough to cover the required cost of the insurance.

Because the dividend scale is not guaranteed, there was no way to guaranty that the premiums would "vanish". These whole life policies are still very popular, and the ability for the dividends to be used to pay for future premium is still available as long as the policy is provided by a mutual company that pays dividends and the policy is “participating”.

There are also “limited payment” whole life policies, which are designed to require premiums for a limited number of years, at which time they become paid up, and require no future premium payments. These policies also tend to be very expensive though.

First answer by ID0000000000. Last edit by ID0000000000. Question popularity: 208 [recommend question]