David H. Kinder, RFC®, ChFC, CLU
Life Insurance Myth 4b: "I can get cheaper whole life with 'vanishing premiums'."
Updated: Jan 18
This post is an extension of my previous post regarding UL/IUL ongoing expenses, and I primarily talked about the funding levels being the main differentiation.
Whole life zealots LOVE to use these sales tactics of the 1980's as a way to hold up whole life as the "superior choice".
And I'd like to bring up another term: "Vanishing Premium".
"Vanishing Premiums" is really a misnomer. What "Vanishing Premiums" on life insurance was all about... was using dividends to pay premiums after the policy has grown enough. In this way, at some point in the future, you (theoretically) wouldn't have to pay for your coverage out of pocket anymore.
And IF that happened, you'd still have ever-increasing dividends to offset level premiums... and eventually the policy will pay you for purchasing it and keeping it.
Here's the Investopedia.com link for Vanishing Premiums: https://www.investopedia.com/terms/v/vanishing-premium.asp
But back then, inflation and interest rates were around 7%+? Right?
And how are interest rates today? Not so good. You won't find anyone selling whole life insurance under the concept of "vanishing premiums".
In fact, even using the term "vanishing premiums" is a problem and has been criticized and penalized by insurance regulators. The best way (or most compliant way) to discuss "vanishing premiums" is to talk about "premium offset by policy values". It's using the dividends, interest earnings, and cash values to continue to pay premiums and keep coverage in-force.
So while critics of UL/IUL policies say "you might have to pay more to keep your coverage"... with whole life "vanishing premiums"... you'd have to continue to pay premiums longer.
The only "saving grace" on these policies is that you wouldn't lose your coverage as long as you paid at least the minimum premiums. You would just have to keep paying the premiums for longer than expected.
There is actually a common thread or theme between these two concepts: The common concept is "people don't want to pay for their life insurance, so let's find the least expensive way to get people to buy it" or "agents believe that people don't want to pay for life insurance, so they find the least expensive concept to get people to buy it."
In today's tax environment and volatile economy, life insurance is a safe haven for your cash values - if the policy is structured properly. And that's for both whole life OR universal life.
In fact, just yesterday, one of the BIGGEST critics of whole life insurance (well, any cash value policy) posted a new blog article: https://www.whitecoatinvestor.com/nuance/
Whole Life Insurance
A lot of people think they know my thoughts on whole life insurance and they’re positive I think it is the devil’s tool and should never be purchased or kept.
In reality, I think whole life insurance is a combination of crummy insurance and a crummy investment usually poorly designed and sold inappropriately. However, I fully acknowledge that it has a set of characteristics that can be attractive to a few people and if those people fully understand what they are buying and still want it and make sure the policy is designed to maximize their desirable characteristics, then they should go ahead and buy it. It does have a few niche uses. I also fully acknowledge that there are times when it makes sense to keep a policy that should not have been bought initially.
So, while there have been lawsuits for UL/IUL unrealistic expectations... so have whole life insurance sold under the concept of "vanishing premiums". I just did an internet search, and one of the options for "Vanishing Premium Life Insurance"... was 'fraud' with a number of attorney sites discussing the problem of such concepts back when this was the "concept of the day". Here's one such link: https://corporate.findlaw.com/corporate-governance/life-insurance-fraud-vanishing-premium-insurance-policies.html
Let's not fall into the Whole Life vs Universal Life trap anymore. It's not about the policy. It's about the funding and the structure. It's really about the competence and expertise of the agent structuring the policies properly, explaining how they work, and setting proper expectations.