Final answer:
State laws, specifically usury laws, dictate that the fixed interest rate on a client's variable life policy loan cannot exceed the upper limit set by the state, often well above the market rate, for example, 30% per year.
Step-by-step explanation:
The student's question relates to the state laws governing the interest rates that can be charged on policy loans for a variable life insurance policy. In several states, usury laws are in place, which means there is an upper limit imposed on the interest rates that lenders, including life insurance companies, can charge on loans. According to these laws, even if a loan's interest rate is described as 'fixed' within the policy documentation, it cannot exceed the maximum rate set by state usury laws.
The limit is often set at a level above the market interest rate; for instance, an upper limit of 30% per year is mentioned. This means that even though the rate is fixed within the policy, it must not surpass this ceiling. The actual impact of such a ceiling depends largely on market conditions - as long as market rates remain below the ceiling, the capped rate is nonbinding and has no practical effect. Only when market conditions drive the equilibrium interest rate above the set ceiling would the cap come into effect and restrict the rate that can be legally charged.