Tennessee Insurance Practice Exam

A company that holds a life insurance policy on its key employee can perform all of the following actions EXCEPT?

1. Change the policy's interest rate

2. Loan against the policy

3. Change the beneficiary

4. Transfer ownership of the policy

The correct answer is: Change the policy's interest rate

The rationale for selecting the option regarding changing the policy's interest rate as the exception lies in understanding the nature of life insurance policies. Life insurance policies typically have predetermined terms outlined in the contract, including the interest rate, which is not subject to change by the policyholder or the company. The key employee in this case refers to an individual whose contribution to the company is deemed to be critical to its success. The company, as the policyholder, has certain rights and privileges regarding the life insurance policy. For instance, the company can take out loans against the policy's cash value, change the beneficiary to ensure the right parties are financially protected, and even transfer ownership of the policy if necessary, potentially to a different individual or entity. However, the interest rate linked to the policy is often set based on actuarial calculations when the policy is issued and cannot be altered by the policyholder after the fact. This ensures stability and predictability in financial planning for both the insurance provider and the policyholder. Therefore, it is the action of changing the policy’s interest rate that is not permissible.