Chapter 4 - Lesson 2

C4-L2-P17

Common Dangers of Misrepresentation

Some specific topics consistently cause the most problems when it comes to misrepresentation. These areas, which often are fairly complex in nature and difficult to explain, include the following:

Vanishing Premiums

This term, which has fallen into disfavor because of past abuses, should no longer be used. During the early days of interest-sensitive and variable products, when interest rates generated double-digit returns, companies began to realize that under ideal conditions, some policies could become self-paying. This realization went from “could happen” to “will happen” in the collective mind of the entire industry. It wasn’t long before the vanishing premium was touted as a major feature of policies, complete with specific (if only implied) vanishing premium dates.


That these vanish points were not guaranteed or that they depended on unrealistic rates of return was often ignored.

When projected or promised vanish dates came and went and policy owners continued to pay premiums, lawsuits and complaints multiplied.


Today producers recognize that the best course of action is to steer clear of the words "vanishing premiums" with clients.

While it is possible for premiums in some policies to vanish under certain conditions, producers should make no guarantees. The vanishing premium concept allows for a policy owner to make cash payments to a point at which future dividend and other cash values may be sufficient to pay all future premiums.

However, the vanishing premium is not a contractual provision or part of the policy and it is not guaranteed.

Growth can often be projected, but it cannot be guaranteed, and this is an important distinction producers must make to clients.

Under no condition should a producer state or imply that premiums will vanish or that premiums may end on a specific date.

One way of presenting the concept is as follows:

“Under one policy option, it is possible, after the policy has been in force for a number of years, to allow your dividends and cash value accumulations to pay your premiums, possibly for good, but not necessarily. Whether the premium ends depends entirely on several factors, including policy dividends the company declares.”

Most responsible insurers absolutely prohibit their agents from using the term vanishing premiums.

Editors Note: The presentation of Universal life or Variable life on a limited payment basis presents other questions regarding the stability of interest rates, market fluctuations, and mortality charges. Most of the preceding commentary is more fitting for ethical presentations of participating whole life contracts where dividends were paid to the policy.