If you're in the market for participating life insurance policy, you may want to consider the so-called "disappearing premium" (previously called vanishing premium) policy-which means that the dividend yield from the policy will eventually be sufficient to cover the entire annual premium cost.
As their name implies, participating polices allow the policyholder to participate, or share, in the life insurance company's profits and losses. At the end of the year, the company analyzes its actual earnings and losses, and returns any surplus to policyholders. In other words, policyholders get a return on the unused portion of their premium.
This surplus is returned in the form of dividends, which policyholders can use in a number of ways. Dividends can be taken as cash, left with the life insurance company to accumulate at interest, used to reduce the premium, used to buy term insurance, or used to buy paid-up additions (PUAs, which are small pieces of additional whole life insurance that have cash value).
Some life insurance companies might structure a policy so that after the initial years of policy maintenance, the policy's dividend yield will be sufficient to cover the entire annual premium cost. This is often referred to as a "disappearing premium" policy.
Under this type of arrangement, the cost of premiums in the earlier years of the policy will be higher. But later in the policy (say, years nine to 20 or later, depending on the company and arrangement), the dividend yield could be sufficient to cover the on-going premium costs. Who could benefit from this type of policy? It may be a good choice if a larger amount of insurance is desired until the death of the insured.
One word about taxes, however: the IRS considers dividends paid to the owner of a life insurance policy a rebate of premiums, so they're tax-free-unless the cumulative dividends reach a point that they exceed the aggregate premium payment over the life of the policy. If that happens in the later years of the policy, you'll have to pay taxes on the excess dividends, even though they're being used to pay premiums.
Ask your life agent to learn about the disappearing premium policies that might be available to you.
This article is not intended to provide tax or legal advice and should not be relied upon as such. It is a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax advisor for advice and information concerning their particular circumstances.
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