What is vanishing premium 's in life insurance?

Answer 1

"Vanishing premium" was a technique used some years aho by life insurance sales people to sell whole life insurance. That is the kind of life insurance that builds cash value within the policy. Stated otherwise, a part of each premium payment goes to cover the cost of the protection (the essence of insurance) and a part goes into what can be likened to a savings account. There are significant differences from a savings account, but it is a useful analogy for this discussion.

When the policy was sold, the salesperson would project that the cash value would increase at a rate commensurate with a future rate of return based upon insurance company performance, or the investment into which the savings element of the insurance premium was being invested (such as a mutual fund). On that theory, and based upon the projection, it was represented that at a given point in the future, before the projected maturity date of the policy, premiums would be fully paid and no further premiums would be due.

This representation did not always mirror the actual return that the insurer got on its investments. If it did not, cash value would not accumulate as fast as projected and the policy would not attain "paid up" status as represented at the time of sale. In fact, if the investments that the insurer made lost money, it might happen that the insured would have to pay additional amounts in order to keep the insurance policy in force.

To make a very long story short(er), the concept of "vanishing premium" was determined to essentially be fraudulent. Many lawsuits were spawned against many insurance companies, agents and brokers for the misrepresentations that resulted in financial losses to the insurance purchasers.