What is a vanishing life insurance premium? Is it a good thing? Perhaps, for some people. Learn about vanishing life insurance premiums from noted life insurance lawyer Chad G. Boonswang, Esq. in this informative article.
If your claim was denied due to nonpayment of life insurance premiums or policy lapse, call the experienced life insurance lawyers at Boonswang Law. We have helped beneficiaries nationwide reverse their claim denial and get the payout their loved one intended. Your initial consultation is free of charge, and we take cases on a contingency basis only – meaning that we do not get paid unless and until you do. Contact us today.
Vanishing Premium Definition
Someone owning a permanent life insurance policy may elect to stop paying premiums once the policy accrues enough value to pay dividends or interest enough to cover the premium payment. In other words, the policyholder can elect to have their life insurance policy fund itself if they have a more lucrative place to put the money they otherwise would pay in premiums.
Whole life insurance and universal life insurance.are types of permanent life insurance.
Term vs Whole Life Vanishing Premiums
Term life insurance is coverage purchased for a specified term, such as 15 or 25 years, during which the policyholder pays periodic premium payments to maintain that coverage. Once the term ends, coverage ends. The policy has no present cash value and only pays out if the policyholder dies within the policy term.
In contrast, whole life insurance does accrue value and stays in effect for the policyholder’s life as long as premiums are paid. Most whole life policies carry a minimum rate of growth, and may grow much more depending upon the performance of the life insurance company’s investment portfolio. If the policy grows in value to the point where either interest or dividends are enough to pay the premium payments, the policyholder can elect to do that.
Vanishing Premiums vs Flexible Premiums
Another type of permanent life insurance is adjustable life insurance, which has flexible premiums and other features. After purchasing coverage, the policyholder can elect to pay more or less in premiums. The policyholder can also alter the amount of the death benefit and the cash value (the portion of the account invested) of an adjustable policy, while a whole life policy having vanishing premiums carries a fixed death benefit.
Flexible premium life insurance comes at a cost – the premiums are much higher than term life insurance and can be higher than for a whole life policy with vanishing premiums. Although you can borrow against the cash value of an adjustable policy the interest on that loan may not be tax deductible. Withdrawing from the cash value of an adjustable policy is a taxable event.
Modern Drawbacks with Vanishing Premiums
Historically, life insurance companies have been overly optimistic regarding the expected performance of their investment portfolio. Some even fraudulently inflated expected returns to attract policyholders. This led potential policyholders to believe that the premium would vanish much sooner than it actually did, so they purchased the policy. The policyholders did not have the information they needed to accurately calculate the cost of the policy and compare it with the cost of a term life insurance policy of equal coverage.
Today life insurance companies are highly regulated. By law they must inform potential policyholders of the risks of purchasing a whole life policy and disclose past performance of their investments, among other things.
One drawback of a vanishing premium in life insurance is that money is taken from the policy to pay the premium, reducing the amount the policyholder could otherwise realize from the investment. Another is the policyholder having unreasonable expectations regarding the growth of the value of the policy, and not planning to pay premiums out-of-pocket as long as they must.
Who Might Need a Vanishing Premium?
Policyholders concerned about long-term fluctuations in income, such as business owners, entrepreneurs, and self-employed/independent contractors, may need to take advantage of a vanishing premium at some point.
What to Do If You or a Loved One Has a Vanishing Premium Policy
If you have a life insurance policy with a vanishing premium and that option is available, you must calculate the true cost of using funds from your policy to pay premiums and compare that with what the premium payment could be earning elsewhere. Only then can you determine whether allowing your permanent life insurance to pay for itself makes financial sense to you.
Of course, if due to your financial situation at the time you do not have the funds on hand to pay the premium, then exercising the option to pay premiums from your policy saves your policy from lapse.
How a Life Insurance Lawyer Helps
Premiums must be paid, and if opting for a vanishing premium, that option must be exercised in writing. If this is not done and the premiums are not paid, the policy may lapse and terminate, and you will lose your paid premiums as well as the accrued cash value. Moreover, the life insurance company will deny your beneficiaries’ claims for your policy’s death benefits.
If your claim was denied due to nonpayment of premiums and policy lapse, call us. There are many reasons for life insurance lapse that are not the fault of the policyholder, and in those cases, we can get our clients paid. Speak to an experienced life insurance lawyer today about your case.