Vanishing Premium
Candlefocus EditorThe core concept of Vanishing Premium is simple: When the dividends earned on the policy exceed the premium due, the policyholder has achieved a Vanishing Premium. This is possible because, over the life of the policy, the dividends earned continually compound, and the cash value of the policy increases. The total cash value of the policy increases until the dividend earnings are sufficient to cover the premium cost in full.
When a policy achieves Vanishing Premium, it allows policyholders to use the money they would have otherwise spent on premiums to do other things with their finances, such as invest or pay off debt. A policyholder’s access to cash is further improved if he or she decides to surrender a policy that has achieved vanishing premium status. The policyholder will receive cash equal to the cash value of the policy minus any unpaid premiums that are still due.
Though it is an appealing concept, Vanishing Premium is not always easy to achieve. Before it kicks in, life insurance holders need to pay times premiums in full, so they will need a large investment of funds up front. Still, Vanishing Premium is compatible with a variety of life insurance policies and can prove to be a powerful strategy to free up more liquidity in the long term.