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

The target premium for a universal life policy primarily serves the purpose of preventing the policy from lapsing. Universal life insurance is a flexible premium, adjustable benefit policy, which means that policyholders have the ability to adjust their premiums and death benefits over time. If the premiums paid do not meet the necessary requirements to cover the cost of insurance, administrative fees, and other charges, the policy can lapse.

By establishing a target premium, the insurer provides a guideline for the policyholder on how much they should ideally contribute to ensure the policy remains in force. This target is based on actuarial calculations that consider the cost of insurance and the policy's cash value accumulation. Paying at least the target premium helps maintain the policy's value and protects it from lapsing, which ensures that the death benefit remains available to beneficiaries.

This understanding emphasizes the importance of managing premium payments in universal life insurance to avoid potential lapses, aligning well with the policy's flexible nature.