What is the target premium in an IUL policy?
Target premium is a reference figure inside an indexed universal life (IUL) or universal life policy. Premiums are flexible, so the policyholder can pay more or less than the target within the contract's limits. The insurer uses the target to decide how some charges apply to the premium actually paid.
How it works
The insurer calculates the target premium when the policy is issued, from the face amount, the age, sex and health class of the life insured, and the policy design. It is expressed as an annual amount and applies to the premium paid in each policy year. Older guides call it the set or target premium.
- Premium charges. Many contracts deduct one premium charge rate on premium up to the target in a policy year and a different rate on premium above it. Each contract sets its own rates.
- The planned premium. The planned premium is the amount the policyholder intends to pay, as shown on the illustration. It can sit above or below the target.
- The minimum premium and the premium ceiling. The minimum premium is the least the contract accepts; the premium ceiling is the most it accepts for the cover. The target sits between them.
Worked example
Illustrative figures, not a forecast, for a single policy year. A policy has a target premium of US$20,000. The contract deducts a premium charge of 8% on premium up to target and 4% on premium above it. The policyholder pays US$50,000 in the year.
- Up to target: US$20,000 × 8% = US$1,600.
- Above target: US$30,000 × 4% = US$1,200.
- Premium charge for the year: US$2,800, so US$47,200 reaches the cash value.
In an international IUL
The target premium works in the background. Capital for Life's indicative planned premiums are on a 10-pay basis, sized to the cover and to the cash value the client wants to build. For US$1m of cover, planned premiums start from about US$11,000 a year for a non-smoker aged 30 to 39. Where a contract charges less on premium above target, funding above target, within the premium ceiling, puts a larger share of each premium into the cash value. The illustration shows the charges that apply to the planned premium.
Common questions
Is target premium the same as the planned premium?
No. The target premium is the insurer's reference figure for the policy. The planned premium is what the policyholder intends to pay, and it can be above or below target.
What happens if you pay less than the target premium?
The policy stays in force as long as the cash surrender value covers the monthly charges. Paying less than planned slows the growth of the cash value and can shorten the policy's life.
Does the target premium change?
It is set at issue. A later change to the policy, such as an increase in cover, can change it under the contract terms.
Go deeper: how IUL premiums and funding work.
Target premium is a premium level the insurer sets for an IUL or universal life policy from the cover, age and health of the life insured. Premium charges are often set at one rate up to target and another above it.
