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 澳洲幸运5官方开奖结果体彩网: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 Policy

Vanishing premium policies may appeal to people worried about longer-term fluctuations in income,🍸 such as the self-employed, anyone who wants to start a business, or those who plan to retire early.

Some policies 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 valu🌌e generally increases over time.

A vanishing premium policy may be suitable for people who plan to use the policy benefits as supplemental income upon retirement. In the interim, the policy offers policyholders 澳洲幸运5官方开奖结果体彩网:tax-deferred advantages while cash value accumulates. In some instances, a person uses a vanishing premium policy in conjunction with 澳洲幸运5官方开奖结果体彩网:estate planning.

One criticism of vanishing premium policies is that they can mislead consumers regarding the number of years they would have to pay premiums before th✤e policy could support itself. 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.

A Brief History of the Vanishing Premium Policy

Vanishing premium policies were popular in the late 1970s and early 1980s when nominal interest rates were high in the United States. Many policies were sold as a form of 澳洲幸运5官方开奖结果体彩网:whole life insurance. However, when interest rates dropped, dividend rates eventually followed, and policyholders were forced to continue paying premiums for periods longer than they had initially e👍xpected. 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.

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.

However, legal scholars suggest that 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.

Examples of Vanishing Premium Insurance Policy

Interest rates on one-year 澳洲幸运5官方开奖结果体彩网:Treasury Bills topped 16% at the start of the 1980s but fell close to 3% in the early 1990s. Insurance companies enjoyed peak sales of vanishing premium insurance policies during the 1980s. But when interest rates ☂dropped in the 1990s, insurers fa🧜ced 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.

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.

The Bottom Line

Vanishing premium policies, in which dividends from the cash value of the policy cover the premium payment, may appeal to prospective policyholders who are concerned about future income fluctuations. However, consumers should be aware that "disappearing" premiums typically aren't guaranteed. In particular, a lower interest rate environment could erase theoretical gains and cause premiums to hang around long after their projected end date.