What is a Vanishing Premium Policy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 November 2019
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Vanishing premium policies are a form of whole life policy contracts that make use of accrued dividends to cover the costs of the premiums on the policy. The idea is that once the accumulated dividends reach a point where they are sufficient to pay the premiums that the policy will become self-perpetuating. That is, once the dividends reach a certain level in the process, they continue to cover the cost of the premiums for the duration of the vanishing premium policy.

The concept of the vanishing premium policy can be attractive for a couple of reasons. First, the use of dividends to cover the schedule of premiums means that the insured party does not have to be concerned about using other resources to make the premium payments. In effect, the policy becomes a workable asset that will provide protection for the future, but no longer requires a direct payment from the insured in order to remain in effect. This can allow the holder of the policy to divert the funds that would normally go for paying premiums to some other type of investment.


Second, once the vanishing premium policy is in full function with dividends paying the premiums, the insured no longer has to be concerned about financial reversals impacting the continuance of the coverage. For example, if the insured loses his or her job or is out of work due to illness for an extended period, there are no worries about making the premiums in order to keep the policy going. This can be a great comfort when an individual is going through a temporary state of financial hardship.

Qualified insurance agents can outline the terms of a vanishing premium policy, as well as help the client determine if this type of coverage is the best option. It should be noted that a vanishing premium policy should not necessarily be considered as a substitute for a standard whole life policy, especially if part of an employee benefit package includes whole live coverage for little or no cost. At the same time, a vanishing premium policy may be ideal for persons who are self-employed, and others that wish to plan for a little extra security.


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