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What are life insurance vanishing premiums?

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Vanishing Premium Life Insurance

Life insurance vanishing premiums are a type of participating whole life insurance which allows the policyholder to use dividends from the company to pay their life insurance premiums. In simpler terms, you invest premiums that make money and pay for your future premiums.

Vanishing life insurance premiums can be quite an attractive option for life insurance for a few reasons. First, once you are to the point of enough accrued dividends to pay your premiums, you can reinvest that money elsewhere.

Second, once the dividends are high enough to pay your premiums, you do not have to worry about a lapse in coverage. Sounds a little too good to be true, right?

In theory, it seems like a great way to get life insurance but not truly have to pay for it. However, many consider it a type of marketing lure that insurance companies and marketing professionals utilized to lure unsuspecting consumers into purchasing life insurance.

The ploy was that the life insurance policy only required payments for the first few years, and then the life insurance “vanishing premiums” would kick in due to interest and company dividend earnings.

In fact, many lawsuits have recently been brought to the court’s attention and it is now illegal for the insurance agent to paint a perfect financial scenario. They are required by federal (and sometimes state) laws to give realistic warnings that as interest rates fluctuate, this will impact the probability of long term dividend payouts for life insurance premiums.

However, you may be reading up on life insurance vanishing premiums because you have already purchased this type of policy. So what should you do if you purchased a life insurance policy that promised vanishing premiums and the premiums…well, are not vanishing? Here are four options you can take with your vanishing premium policy.

Option 1

If your premium is very close to a point where the dividends could pay for the policy, continue to make payments until the vanishing premiums do in fact kick in. While this is the least likely of options, it is certainly a possibility and it will benefit you greater to continue to invest in this insurance rather than to sacrifice all the premiums paid to the policy.

Option 2

Although this is not the most ideal option, have the policy rewritten to a lower death benefit. This will still allow for a benefit if something was to happen, but then you no longer have payments to make. The insurance company can take the cash value to convert you to a type of policy referred to as a paid full policy.

Option 3

Have the policy changed to an extended term policy. This basically uses your cash value to extend out your policy to a certain amount of years (depending on how many you have paid into already, your age, etc.). The downfall is that if the extended term policy goes full-term, you are out of a benefit and all the premiums you paid into the policy.

Option 4

Use the cash value to pay the premium. Borrowing from the cash value allows you to keep your death benefit and the cash value will still continue to grow each year. However, depending on how long you continue this, you could deplete all of your cash value and your policy will cease to exist.

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Should you buy vanishing premium whole life insurance?

The main conclusion is to be very cautious about life insurance policies that offer vanishing premiums. Over the years, this has proven to mainly be a marketing scheme to get consumers to lock into a life insurance contract. There have been many court cases that have uncovered schemes, selling tactics, and fine print which have fooled many consumers. In many examples, the consumers paid into policies for 10, 15, or even 20 years before realizing that they had been scammed.

Broberg v. Guardian Life Insurance Company

However, other court cases have found the consumers to be in the wrong. One example is Broberg v. Guardian Life Insurance Company, in which Guardian Life Insurance sold a consumer (Powell) a $500,000 life insurance policy in 1993 with a “promise” for vanishing premiums after the 11th year. Once that year came around and he still owed premiums, he took them to court.

The court did not find in his favor because he received statements that showed differing numbers in dividends than the initial outlined plan he was sold, as well as a disclaimer he signed off on that stated “actual dividends may be higher or lower than illustrated.” The main point of this example is that the consumer must maintain some form of responsibility when purchasing something as large and important as life insurance.

Finding the Best Life Insurance Policy

Buyer beware. If you are seeking a life insurance policy be certain to know your options. The independent insurance quote tool offered on this page is a great place to begin your search. Simply enter your zip code to start finding free insurance quotes!

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