After out-of-pocket premiums have been paid for a number of years, premiums may be able to be paid by the current values of your policy. This process is known as “Premium Offset”. Premiums may be able to be paid either by current dividends, and/or existing values within your policy through the surrender of a portion of the Paid-Up Additions. If you have your dividend set to accumulate cash, premium offset can be paid from these cash accumulations too.
It is important to note that the growth rate in both the death benefit and the cash value are reduced when premiums are paid by using premium offset, rather than by out-of-pocket payments. Also, be aware that most insurance companies will automatically cancel the Additional Deposits option when premium offset is selected, which will further impede the future growth of the policy. Typically, we find that the premium offset is not recommended, if at all possible, because of this loss of growth potential within your policy.
Since premium offset is dependent on dividends that are not guaranteed over time, increases and decreases in the amount of dividends credited over the life of the policy will affect the availability of premium offset. Such increases or decreases may also affect the length of time that the premium may be paid, in whole or in part, by dividends, or change the potential offset date shown on the original illustration. It is possible that a policy will never be eligible for premium offset, or that it will become eligible and subsequently cease to be eligible, based on dividends received.
Additionally, some insurance companies in Canada will restrict or prevent the access to policy loans if the premiums are offset, or refuse to offset the premiums until all outstanding loans have been paid back (with interest). It is recommended that you talk to your advisor about how this might impact you and your policy, before opting for premium offset. It can be a great option but it can also unintentionally severely hamper the growth and performance of your policy.