South Carolina Life Insurance Practice Exam

What is the purpose of establishing the target premium for a universal life policy?

1. To ensure a minimum death benefit

2. To generate a cash reserve for the policy

3. To prevent the policy from lapsing

4. To maximize the insurer's profit margin

The correct answer is: To prevent the policy from lapsing

Establishing the target premium for a universal life policy serves primarily to prevent the policy from lapsing. The target premium is an amount that, when paid, ensures that the policy has sufficient funds to cover mortality costs, administrative expenses, and to maintain the intended level of coverage. By setting a target premium, the insurer guides the policyholder on the amount needed to keep the policy in force and protect against unexpected lapses due to inadequate funding. Universal life policies are flexible and allow policyholders to adjust their premiums and death benefits; however, if the premiums paid fall below a certain threshold over time, the accumulated cash value may decline, and eventually, the policy could lapse. Thus, adhering to the target premium is crucial to maintaining the policy's effectiveness and ensuring the death benefit remains intact for beneficiaries.