The Planned or Target premium is the amount modeled by the software and is based on the variables the insurance broker enters into the program, including an assumed rate of return. The assumed rate of return is important, since a higher non-guaranteed return results in a lower premium and vice versa.
The No Lapse Guarantee premium is the amount that must be paid to ensure that the policy will stay in force for a set number of years, regardless of actual policy performance. During the no lapse period, the insurer guarantees the coverage will continue, even if the cash value drops to zero. However, once the guarantee period ends, the policy could lapse unless a significantly higher premium is paid. The no lapse period can range from as few as 5 years even up to age 121. In exchange for the guarantee, contracts with longer guarantee periods tend to build significantly less cash value than does the same contract using the target or other non-guaranteed premium.
The Guideline Premium and the Cash Value Accumulation tests were devised to provide an IRS-approved way to determine the tax treatment of a life insurance policy. The guideline premium test requires a policy to have at least a minimum amount of at-risk death benefit (insurance that exceeds the cash value). The corridor amount is greater when the policy holder is young and decreases as a percentage of the total death benefit as one ages, eventually dropping to zero by age 95. If the premium exceeds these guidelines, then the policy could be taxed as an investment rather than as insurance.
The Modified Endowment premium is the amount that makes an insurance policy a Modified Endowment Contract (MEC). Under the Technical and Miscellaneous Revenue Act of 1988, distributions from a policy determined to be a MEC, such as loans or cash surrenders, are potentially taxable and could be subject to an IRS 10% penalty tax. However, the death benefit remains income-tax free. A policy can become a MEC when the combined premiums paid during the first 7 years that the policy is in force exceeds the 7 pay test premium. The illustration software automatically calculates the 7 pay premium amount. The IRS has established these measures to help curb abuses where insurers sold policies with a nominal amount of insurance that were really designed to build a large amount of tax-free cash value. The 7 pay amount varies by age and kind of policy.
The Minimum premium is the amount that must be paid to put the policy in force. This amount is usually not sufficient to keep the coverage in force for life, unless the insured is very young. This premium may be used, for example, when a 1035 exchange from another policy is pending or the policy is owned in a trust and when issued gifts will be made to provide additional funding.
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