When those vanishing premiums don't vanish

By Ginger Applegarth

Permanent life insurance is a lot tougher to sell than the much cheaper term life. Agents often use the "vanishing premium" concept as a way to make permanent insurance more palatable to potential clients.

"These premiums may look high today," an agent might say, "but they'll disappear after a few years and the policy will pay for itself."

Such sales pitches sold permanent life insurance policies like hotcakes in the 1980s and '90s, but in many cases the vanishing premiums failed to disappear. As a result, insurers were besieged by class-action lawsuits.

Yet agents continue to sell products based on very unrealistic rates of return.

Vanishing premiums aren't dishonest

Technically, there's nothing wrong or dishonest about the vanishing premium technique. It's a simple concept: The cash surplus from premiums paid in the early years earns enough in later years to pay the premiums. The policy becomes "self-supporting" at that point.

There's only a problem if the assumed rate of return is unrealistically high. That's when your vanishing life insurance premium doesn't vanish as expected.

For example, suppose you had purchased a permanent life insurance policy in 1994 with the understanding that you would not owe premiums after the tenth year. You might have received an illustration showing a 10% rate of interest and your premiums vanishing in 2004.

But interest rates have dropped substantially since 1994, meaning that the dividend rate (for whole life) and interest rate (for universal life) have dropped substantially, as well. Instead of 10%, your policy may be earning as little as 6% or even less, depending upon the company and type of policy you purchased. So instead of paying premiums for 10 years, you may be 15 years into the policy and still paying -- and you could keep on paying for years to come.

Video: How much life insurance is right?

Take action now

If you bought a policy assuming your premiums would vanish at a certain point, chances are you will have to pay longer than you expected. What should you do?

First, contact your insurance company to find out if there is a class-action lawsuit pending or that has been settled. You should have been notified of the suit and your options, but it doesn't hurt to check. You can also call your state insurance department to get a list of the companies targeted in class-action suits.

Continued: Your 4 options

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