Final answer:
The '12% Rule' related to variable life policies ensures that producers cannot illustrate a potential interest rate higher than 12% when offering a new policy, similar to usury laws that cap interest rates to protect consumers. This helps to maintain realistic expectations by keeping illustrations within a reasonable range according to typical market conditions.
Step-by-step explanation:
The '12% Rule' in relation to variable life policies is a regulation that dictates the maximum interest rate that a producer can illustrate when soliciting a new policy. This rule stipulates that the producer may not use an interest rate higher than 12% for the purposes of demonstrating the policy's potential growth or benefits.
Similar to usury laws that impose an upper limit on interest rates that lenders can charge, the 12% Rule is designed to prevent unrealistic expectations regarding future returns. States implement these laws and regulations to protect consumers from being misled by excessively high interest rate projections, which could result in misunderstandings regarding the actual potential growth of their investments. Just as a price ceiling might be set high but remains nonbinding as long as market interest rates are lower, the 12% Rule acts as a safeguard, ensuring that policy illustrations stay within a reasonable range.
Given that market forces can cause actual returns to fluctuate, it is important that policy projections remain conservative and realistic. This rule makes sure that life insurance policy buyers are not enticed by, and do not base their financial planning on, artificially inflated rates that are unlikely to be achieved in typical market conditions.