Vanishing Premium Policy
Candlefocus EditorThese policies are especially attractive during periods of high interest rates, because when a policy’s cash value earns higher interest, it can cover more of the policy’s costs. Vanishing premium policies became popular during the late 1970s and 1980s, when interest rates were rising.
The most common form of vanishing premium policy is called whole life insurance. This policy combines a death benefit with a savings account. The savings account accumulates value and once the savings reach an amount equal to the premium payments, the client no longer has to make any payments.
They can also be structured with an increasing death benefit. These stand-alone policies, also known as increasing term policies, remain in force until the end of the policy period regardless of the cash value's accumulation. The death benefit increases each year by a certain amount and the policyholder can collect any dividends earned. A third type of policy, known as a single-premium whole life policy, requires only one payment to purchase the policy.
Regardless of the policy, with a vanishing premium policy the client's ultimate goal is the same – to have enough of the cash value earning interest to cover the costs of the policy.
Vanishing premium policies offer certain benefits that traditional life insurance policies do not. They are an effective way to use interest accumulation to cover the cost of an insurance policy over time. Plus, many policies also offer a potential for tax savings as well. That said, it’s important to remember that as with all investments, there are always risks, so it’s a good idea to consult with a licensed insurance broker or financial advisor before investing.