Rhode Island Life Insurance Practice Exam

A company holding a life insurance policy on a key employee CANNOT do which of the following?

1. Change the beneficiary

2. Change the policy's interest rate

3. Terminate the policy at any time

4. Adjust coverage limits

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

The correct choice relates to the specifics of how life insurance policies operate, particularly concerning interests and rights associated with the policy. A company holding a life insurance policy on a key employee does have the authority to change the beneficiary, terminate the policy, and adjust coverage limits, provided these actions are within the terms specified in the policy initiation process and adherent to any regulatory requirements. The aspect that is not permissible is changing the policy's interest rate. Life insurance policies have predetermined interest rates that dictate how the cash value grows over time. Unlike financial products such as savings accounts or investment vehicles where interest rates can fluctuate, the interest rate on a life insurance policy (especially for whole or universal life products) is typically set when the policy is purchased. Hence, the policyholder cannot arbitrarily change this interest rate because it is a fundamental feature of the insurance contract defined at issuance, which governs how the policy accumulates value and influences payouts. This aspect of life insurance ensures consistency and security for the policyholder and beneficiary, preserving the integrity of the policy’s terms and ensuring that the benefits can be predictably analyzed over time.