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Vanishing Premium Policy Definition

Updated on September 28, 2023 , 287 views

As per the vanishing premium policy meaning, it is a policy that enables policyholders to make the premium payments using the dividends accrued from that particular policy.

The cash value of such a policy increases over time to the point in which the dividends earned become equal to the premium payment. It is at this point when the premium is said to vanish or disappear! Hence, the policyholder doesn’t need to put down money for premium payments from their own pocket!

Vanishing Premium

The dividend payments gained from the Life Insurance policy’s cash value are based on the present-day interest rates. In vanishing policies, these dividends are supposed to cover the premium payments after a certain period of time.

How Vanishing Premium Policies Work?

Vanishing premium policies may be a good choice for consumers who are worried about long-term Income fluctuations. For example, the self-employed, the individuals willing to launch a startup, or the ones who wish to retire early in life are generally the most beneficial from this policy.

Many vanish premium policies come with high annual premiums during the early years, that is, during the period when the policy is providing modest benefits. Gradually, the premiums may start to drop, while the benefits received may increase.

Yet some other vanishing policies may come with a relatively steady premium along with fixed benefit levels until the vanishing point occurs, when the dividends earned become equal to the premium amount.

In both cases, the cash value usually increases over time. Vanishing premium policies make sense when there are high rates of interest.

Consumers who wish to use the policy benefits received as a supplemental or passive income after retirement can find a vanishing premium policy the most suitable. A vanishing premium policy may provide the policyholders with tax-deferred benefits in the interim period while the policy’s cash value accumulates.

In some cases, however, an individual may opt for a vanishing premium policy together with estate planning.

During the late 1970s and 1980s, there was a drastic rise in vanishing premium policies, since it was a period of high interest rates.

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Features of Vanishing Premium Policy

The cash value of such a policy usually increases over time. But such an increment may happen in two ways:

  • In the first case, the policy has high annual premiums during the early years when the policy offers only modest benefits. Gradually, the benefits offered by the policy increases over time, and the premium amount to be paid starts to decrease simultaneously. This structure of vanishing premium policy is more commonly used.

  • In the second case, the policy has a relatively steady premium, together with a fixed, predetermined number of benefits provided to the policyholder. But this can only occur when the policy reaches its vanishing point. In the later years, the dividend payments used to cover the premium amounts go at par with the Market’s prevailing interest rates.

Therefore, a vanishing premium policy can offer greater advantages during periods when there are high interest rates prevailing in the market.

Additionally, policyholders can receive good tax benefits. As the dividend starts to accumulate with time, consumers can enjoy a tax-deferred benefit.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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