Unvanishing Premiums

Katt, Peter C.
July 1995
Journal of Financial Planning;Jul95, Vol. 8 Issue 3, p101
Academic Journal
This article focuses on life insurance policies. The author says that the management of previously purchased life insurance policies has become an important aspect of his firm's life insurance advisory services. The vast majority of these existing policies were originally set up on a vanishing-premium scenario. Vanish-premium designs feature an estimated number of years the premium might need to he paid in order to have sufficient funding for a policy. According to the author the only situation find acceptable for a vanish-premium design is a life insurance program featuring very high annual premiums relative to modest initial death benefits that are projected to increase dramatically overtime. With this design, if the actual performance of the policy is weaker than promised, the policy would not be in danger of lapsing, because the ratio of premiums to death benefits is very high. Only the investment aspect of the policy would not be as favorable as promised. This concentration of a policy's funding when a vanish-premium, level death benefit design is used not only is responsible for the great shock when consumers discover chat many more premium payments may be necessary than had been originally promised, but the concentrated funding for level death-benefit policies reduces an important element of control.


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