What is a Vanishing Premium Policy?

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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 ...  more