what is vanishing premium policy
a vanishing premium policy is a form of permanent life insurance in which the holder can use dividends from the policy to pay its premiums over time the cash value of the policy increases to the point where dividends earned by the policy equal the premium payment at this point the premium is said to disappear or vanish understanding vanishing premium policyvanishing premium policies may be appropriate for consumers worried about longer term fluctuations in income such as the self employed people who wish to start a business or individuals who wish to retire early some come with a high annual premium in the early years at which time the life insurance policy offers modest benefits the premium may subsequently drop and benefits then increase other policies may have a fairly steady premium and a set level of benefits until the vanishing point in each case cash value generally increases over time a vanishing premium policy may be suitable for consumers who plan to use the policy benefits as supplemental income upon retirement in the interim the policy offers policyholders tax deferred advantages while cash value accumulates in some instances a person uses a vanishing premium policy in conjunction with estate planning one criticism of vanishing premium policies is that some insurance representatives who had sold these products in the past faced accusations that they misled consumers regarding the number of years for which they would have to pay premiums before the policy could support itself this situation was a result of circumstances in which vanishing premium policies came into existence see below consumers may also want to be careful not to rely mainly on the maximum benefit relative to minimum premiums as the amount earned could fall below this scenario lastly it is important for prospective buyers to understand that the amount credited to cash value is lower when interest rates are lower than the expectation described in the policy if this happens policyholders may end up paying premiums for more years than they first thought this also is why buying a vanishing premium policy during a period of historically high interest rates might be a bad idea a brief history of the vanishing premium policyvanishing premium policies were popular in late 1970s and early 1980s when nominal interest rates were high in the united states many policies were sold as a form of whole life insurance however when dividend rates eventually followed interest rates lower policyholders were forced to continue paying premiums for periods longer than they had initially expected in some cases the premiums never went away the vanishing premiums never vanished policyholders sued claiming they were misled suits were filed against major insurers including new york life prudential metropolitan transamerica john hancock great west jackson national and crown life insurance crown life settled a class action suit with policyholders for 27 million in a separate case brought by a policyholder in texas crown life was initially hit with a 50 million ruling but later settled out of court for an undisclosed sum great west settled its class action suit for 30 million while new york life insurance paid out 65 million 1 negative publicity concerning vanishing premium policies led to regulatory investigations and money magazine to list the policies as one of the eight biggest rip offs in america on its august 1995 cover 1 however legal scholars suggest the insurance companies did not breach their contracts with policyholders the written contracts expressly stated that future interest rate credits were not guaranteed and depended on the discretion of the insurers in light of future economic events additionally state laws also provided customers with a free look period during which they could back out of an insurance contract 1 examples of vanishing premium insurance policyinterest rates on one year treasury bills rose as high as 16 at the start of the 1980s but fell to 3 in the early 1990s 2 insurance companies enjoyed peak sales of vanishing premium insurance policies during the 1980s but when interest rates dropped in the 1990s they faced lawsuits from customers in one case mark markarian sued connecticut mutual life insurance when markarian bought a life insurance policy in 1987 his broker said he would only need to pay premiums of 1 255 for the next seven years and 244 in the eighth year but markarian received a notice from connecticut mutual in 1995 claiming he still owed premium payments 3 other cases raised similar complaints for example an insurance broker filed a cross claim against crown life insurance company after a client had filed suit against him based on crown s projections the broker had told his client their premiums would not exceed 91 520 when in fact the clients later learned the premiums would never vanish and could total more than 800 000 4 