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by Lani Luciano

For over a decade, life insurers have been using a gimmick called a vanishing premium to sell some whole life policies. The pitch: instead of buying cheap term insurance that pays off only when you die, or a traditional whole life policy that requires decades of premium payments, you invest two, three, even five times the annual premium for term insurance in a whole life policy that will be paid off in only eight to 10 years. By that time, the agent may explain, your policy will be generating enough in dividends to pay the premiums on its own. You still have life insurance, but no pesky premium bills. Meanwhile, your cash value grows and grows, making the policy an ideal way to save for financial goals, such as retirement or college tuition.

Unfortunately, the only people whose financial goals are well served by vanishing premium policies are the insurers and their sales agents. The agent, for example, pockets a commission equal to 55% or more of the first-year premium plus another 5% to 8% of subsequent annual premiums. What's worse, according to a growing number of consumers - including the more than 100,000 purchasers expected to participate in a class-action suit filed last May against Prudential - the premiums may never "vanish." That's largely because the rosy investment returns rarely come to pass. Indeed, dividents may be so low that policyholders will still be paying premiums out of their own pockets years later. Buyers who catch on and drop their policies within three to four years have typically wasted about $2,000 in premiums.