Vanishing Premium Option
Definition - What does Vanishing Premium Option mean?
A vanishing premium option is a feature of participating permanent life insurance policies that allows the policyholder to apply the investment returns earned by the cash value of the policy to the premium fee. Eventually, the paid premiums earn enough money to cover future premiums, and the policyholder no longer needs to pay them out of pocket.
It may also be known as a vanishing premium provision.
Insuranceopedia explains Vanishing Premium Option
A vanishing premium option can be an attractive option for two reasons: It ultimately allows the policyholder to reinvest money set aside for future premiums, and once the dividends are sufficient to pay premiums, there is no need to worry about lapse in coverage.
However, there have been many instances, such as Broberg v. Guardian Life Insurance Company, in which the insurance provider was accused of misleading consumers. In response, federal and some state laws require insurance companies to provide realistic projections of vanishing premium options so consumers have a better idea about the number of years they would have to pay before the policy can sustain itself on the dividends.