Term Life Insurance Articles
The Vanishing Premium And When It Comes Into Effect During The Term Of A Policy
2010-05-19
The vanishing premium is a term life insurance policy that reached its peak popularity in the U.S. in the mid eighties. The concept was formed during a time period in which the dividend rates were at an all time high. Dividend rates are the annual amount that an insurance company pays to its shareholders. The vanishing premium sales pitch was presented as a guaranteed investment yielding a maximum payout with minimal contributions. Consumers that enrolled in vanishing premium policies were informed that they would pay high premiums for only a few years, after which their accrued investment would be so high that it would be used to continue paying the premiums for the remainder of the term.
The concept made perfect sense for those who wanted lifelong insurance without continuing to pay premiums. In theory, the interest of dividends would pay for itself and the premiums would only be paid by the policy holder for the first couple years. For someone who has a history of unstable work, is self-employed, or has an uncertain future, the thought of not having to pay future premiums was very attractive.
As it turns out, the high dividend rates of the eighties were short lived and during the next couple years the dividend rates returned to regular levels. The projections of term life insurance representatives did not quite pan out as planned, and those who were promised only a few years of paying premiums at their own expense were in for a surprise. As a policy holder came to the end of his premium paying cycle, the insurance seller would come back into the picture and explain that the projections had been revised. Lower dividends did not allow a policy holder to reach the amount of savings necessary to stop paying premiums and therefore, the premiums would have to be continued to be paid at the expense of the consumer. The original projections were not guaranteed and the premiums would continue to be paid for an undetermined amount of time.
The reality was that amount of savings needed for premiums to vanish was an improbable prediction. Although the scenario was not impossible, many consumer lost faith in the plan and allowed their plan to lapse.
In theory, a vanishing premium should go into effect as soon as the accrued savings reach a high enough level to pay the premium on its own. Since an insurance company's performance and dividend payouts are always variable, there is no guarantee to whether a vanishing premium will ever actually "vanish." Even though it is not really seen, it is good to know the history behind it.
Free Insurance Quotes
The vanishing premium is a term life insurance policy that reached its peak popularity in the U.S. in the mid eighties. The concept was formed during a time period in which the dividend rates were at an all time high. Dividend rates are the annual amount that an insurance company pays to its shareholders. The vanishing premium sales pitch was presented as a guaranteed investment yielding a maximum payout with minimal contributions. Consumers that enrolled in vanishing premium policies were informed that they would pay high premiums for only a few years, after which their accrued investment would be so high that it would be used to continue paying the premiums for the remainder of the term.
The concept made perfect sense for those who wanted lifelong insurance without continuing to pay premiums. In theory, the interest of dividends would pay for itself and the premiums would only be paid by the policy holder for the first couple years. For someone who has a history of unstable work, is self-employed, or has an uncertain future, the thought of not having to pay future premiums was very attractive.
As it turns out, the high dividend rates of the eighties were short lived and during the next couple years the dividend rates returned to regular levels. The projections of term life insurance representatives did not quite pan out as planned, and those who were promised only a few years of paying premiums at their own expense were in for a surprise. As a policy holder came to the end of his premium paying cycle, the insurance seller would come back into the picture and explain that the projections had been revised. Lower dividends did not allow a policy holder to reach the amount of savings necessary to stop paying premiums and therefore, the premiums would have to be continued to be paid at the expense of the consumer. The original projections were not guaranteed and the premiums would continue to be paid for an undetermined amount of time.
The reality was that amount of savings needed for premiums to vanish was an improbable prediction. Although the scenario was not impossible, many consumer lost faith in the plan and allowed their plan to lapse.
In theory, a vanishing premium should go into effect as soon as the accrued savings reach a high enough level to pay the premium on its own. Since an insurance company's performance and dividend payouts are always variable, there is no guarantee to whether a vanishing premium will ever actually "vanish." Even though it is not really seen, it is good to know the history behind it.
