What do the Terms Churning and Vanishing Premiums mean

The term “churning” when applied in the insurance context, refers to the practice whereby life insurance agents convince clients to surrender or discontinue their old policy and buy a new one.

The act itself doesn’t have any benefit for the insured. One way that fraudulent life insurance agents go about doing it is by telling the client that they can get a new policy offering higher coverage for the client. The agent then tells them they can discontinue their old policy and use the premium that they would have paid for their old insurance plan to pay the new one instead.

Another way that deceptive life insurance agents go about it is by tapping on the cash value of the pre-existing policy to pay the premiums for the new policy. Typically, the life insurance agent will hide the documents authorizing the use of the cash value accumulated by the old insurance plan under “necessary paperwork”. The cash value accumulated will then be used to pay the premiums for the new life policy. The client continues to pay the same amount, which is actually used to maintain his old policy, while under the impression that he is getting higher coverage.

Deceptive life insurance agents engage in this practice because the bulk of their commission comes from selling new policies. In cases where a new life insurance agent takes over an insurance policy from a client whose agent has retired, they don’t earn any commission on the pre-existing policy.

As for the term “vanishing premiums”, while it does not refer to outright deception by a life insurance agent, it does still refer to a practice of misrepresentation.

Here’s how a life insurance agent will go about using a “vanishing premium” sales pitch. For universal life policies, they typically pay out dividends. Assuming a constant rate of growth for the insurance company, the dividends payout will get higher and higher each year as the cash value of your policy builds up. Eventually, it’ll reach a point will the dividends could be used to pay your premiums, and your life insurance policy will just pay for itself. The insured no longer has to pay a premium, and it has effectively vanished.

This practice has since been made illegal, since the above scenario, while possible, does include a few assumptions which life insurance agents typically fail to mention. One, it assumes that the life insurance company will continue to make a profit every year, since companies don’t pay dividends when they are making a loss. Two, it assumes that the insured will leave the cash value of their insurance policy untouched.

“Vanishing premiums” sales pitches are not to be confused with limited payment life policies. Limited payment life policies are policies designed so that they require premiums for a limited number of years, and after that require no further premium payments. Limited payment policies tend to be more expensive when compared to a more traditional whole life plan.