Life Insurance Policies with Vanishing Premiums – and Vanishing Policies
Many life insurance companies have sold life insurance policies with the enticing premise that the premiums paid in the early years of the policy will accrue interest that will pay for the premiums owed in the later years. These policies were marketed with illustrations showing the interest being used to pay the premiums, referring to them as “vanishing premiums.” The theory behind policies with this structure is that the premiums are relatively high when the policy is first issued, while the policy-holder is in his or her earning prime. The premiums paid then accumulate cash value, which generates interest that is used to pay the premiums in later years, when the policy-holder is earning less or retired. Thus, the premiums are supposed to vanish, which is an appealing prospect for someone purchasing a whole life or universal life policy they plan to maintain until their death. (These policies differ from a term life policy, which lasts for a fixed number of years, for which the premiums are generally much lower than whole or universal life policies offering the same level of insurance coverage.)
There is nothing inherently wrong with a vanishing premium policy; however, since interest rates are much lower in recent years than was the case when the policies were issued, the result is that the accumulated interest ends up being insufficient to pay the premiums in the long term. So, for example, the policy-holder pays high premiums for years 1 through 15; the cash value of the accumulated interest covers the premiums for years 16-20; and then suddenly, in year 21, the insured is again asked to make a premium payment. Having grown accustomed to not paying the premiums, the policy-holder often does not understand the change in circumstances, is confused by the notice demanding payment, or does not have the money to pay. The unfortunate outcome in these situations is that the policy-holder does not make the required premium payment. When this occurs, the policy is cancelled, despite the fact that thousands of dollars in premiums (or hundreds of thousands of dollars) have been paid over the course of many years and despite the fact that the illustration used in marketing the policy turns out to be incorrect. The likelihood of this occurring is particularly high when the policy-holder is elderly and may not fully comprehend complex financial documents or is in a lower earnings bracket.
If you or a family member has a life insurance policy with this type of premium structure, it is important to monitor any notices you receive from the insurance company. Be on the look-out for any notice indicating that a payment must be made by a specific date in order to avoid cancellation of the policy. If it is not clear whether a payment is owed or whether the accrued interest is sufficient to cover the premium, contact the insurance company to make sure you understand the situation.
If you recently lost a loved one who had life insurance for which payment was denied, you may have a claim. The life insurance attorneys at Trief & Olk are available to answer your questions and represent you if life insurance has been denied. Feel free to consult our website for examples of the many successes we have had when life insurance companies denied payment or call us directly to discuss how we may help you.