Target Premium

A universal life illustration for Valdis shows three different premium figures labeled MINIMUM, TARGET, and MAXIMUM. What does each one represent?

1. A.Minimum keeps the policy in force short term, target is the amount the policy was designed around, and maximum is the ceiling set by federal tax lawCorrect. The three figures mark short-term survival, the design-basis funding level, and the tax-law limit.
2. B.Minimum is the tax-law floor, target is the commission base, and maximum is the amount required to guarantee the policy to maturityIncorrect. Tax law sets a ceiling, not a floor, and no illustrated premium by itself guarantees coverage to maturity absent a no-lapse guarantee.
3. C.All three are set by state regulation to standardize universal life pricing across insurersIncorrect. Minimum and target are the insurer's own design figures; only the maximum derives from law, and it is federal tax law rather than state regulation.
4. D.Minimum and target are identical, and maximum is simply twice the target premiumIncorrect. Minimum is meaningfully lower than target, and the maximum is computed under the tax code, not as a multiple of target.

Why: The MINIMUM premium is the smallest amount that will keep the policy in force in the near term by covering current charges - pay only this and the policy is fragile and likely to require far more money later. The TARGET premium is the amount the insurer designed the policy around, roughly what is needed to sustain the coverage under current assumptions, and it is typically the base on which first-year commission is calculated. The MAXIMUM premium is the ceiling imposed by federal tax law; exceeding it would cost the contract its status as life insurance.

A universal life illustration shows both a 'minimum premium' and a 'target premium.' The TARGET premium represents:

1. A.The amount that guarantees coverage regardless of performanceWrong. Guarantees come from no-lapse riders, not the target premium.
2. B.The refundable deposit required at issueWrong. Premiums are not deposits and are not refundable.
3. C.The amount designed to carry the policy for life under illustrated assumptionsCorrect. Target funding aims at lifetime sustainability.
4. D.The legal maximum the insurer may acceptWrong-but-tempting. Maximum funding is capped by TAX guideline rules, a different concept.

Why: The target premium is the suggested level, under illustrated assumptions, intended to keep the UL policy in force to maturity, comparable to a whole life funding level; the minimum premium merely activates and briefly sustains coverage. Citation: universal life illustration practice. Takeaway: fund at target for lifetime coverage - minimum is a short-term floor.