What is a Vanishing Premium?

A vanishing premium is a periodic fee paid for an insurance policy that continues until the cash value of the policy grows enough to cover the fee. The premium “vanishes” at that point because the policy’s internal value and dividend stream sufficiently cover payments.

How a Vanishing Premium Works

A vanishing premium allows a life insurance policy owner to pay premiums using the money accumulated in the policy instead of having the insured make payments. The policyholder no longer needs to pay the premium out of pocket, which is the only way it disappears.

Only the dividends that the investment’s accumulated capital pays out are sufficient to cover the premium payments. This enables the policyholder to spend money that would otherwise be required for premiums for another, more profitable purpose. Due to the automated premium payments, it also ensures that the insurance coverage won’t expire.

When considering plans with disappearing premiums, consumers should carefully examine the calculations supporting the date the premiums disappear. The policy’s underlying assets must continue to provide interest or dividends high enough to cover payments to eliminate premiums.

Excessively Positive Presumptions and Disappearing Premiums

Vanishing premiums have historically been connected to insurance fraud schemes when insurers deceived prospective customers into thinking their premiums would disappear far sooner than they did by using deceptive sales examples.

In the situation of a vanishing premium, when an investor tries to accumulate enough principle to throw off dividends at a set threshold, unrealistic assumptions about interest rates and investment returns may have a significant impact.

In the past, disappearing premiums have caused controversy when insurance firms have overestimated their prospective investment returns in the future and when premiums would disappear.

Vanishing Best Illustration

Consider, for instance, a $5,000 premium whole life insurance policy. The policy’s accrued cash worth must provide a $5,000 yearly payout for the bonus to disappear. The policy’s cash value would have to reach $100,000 at a five percent interest rate to eliminate the premium.

Particular Points to Remember

In most cases, whole-life plans include a projected growth number that is contingent on the success of the insurance company’s investment portfolio, in addition to a minimum annual growth figure. The minimal growth rate could take a lot longer to get to the point where premiums disappear, and that would only be possible if the interest rate were high enough to maintain the threshold principle amount.

An astute investor will compute the entire cost of a whole-life investment with disappearing premiums and compare it to less expensive options like term life, estimating the potential return from investing the difference between those two premium prices in another investment vehicle. This is because premiums do not disappear as much as they reduce dividend payouts.

Conclusion

• A permanent life insurance policyholder with a disappearing premium might utilize the policy’s profits to cover the necessary payment.
• The policy’s cash value increases until the dividend received and the premium amount due are equal.
• After the dividend payments eventually balance the premium, the premium is said to have “vanished.”
• Generally, premiums don’t entirely disappear; they gradually decline as dividends eventually take up a larger share of the premium.