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IIQE- paper 3
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- Question 1 of 30
1. Question
Which of the following are incorrect?
Correct(a) The typical Incontestability Provision (or Incontestable Clause) states that the insurer will not (normally – see below) contest the contract after it has been in force during the lifetime of the life insured for two years from the date of issue. (If the phrase ‘during the lifetime of the life insured’ was omitted and the life insured died during the contestable period, the beneficiary might possibly delay making a claim until the end of this period and seek protection of the provision); (b) Under Hong Kong law, an Incontestable Clause cannot be relied upon in the event of fraud on the part of the claimant or the insured. Hong Kong law will not support fraud, whatever a contract may say.
(c) Such a clause would not have the effect of preventing the insurer from raising the question of illegality, e.g. for lack of insurable interest.
(d) An Indisputable Clause (the UK equivalent of the Incontestability Provision) has been held by the English courts to be incapable of preventing an insurer from avoiding liability on grounds of negligent misrepresentation on the part of the insured unless the clause expressly mentions negligence or the clause does not otherwise make sense.Incorrect(a) The typical Incontestability Provision (or Incontestable Clause) states that the insurer will not (normally – see below) contest the contract after it has been in force during the lifetime of the life insured for two years from the date of issue. (If the phrase ‘during the lifetime of the life insured’ was omitted and the life insured died during the contestable period, the beneficiary might possibly delay making a claim until the end of this period and seek protection of the provision); (b) Under Hong Kong law, an Incontestable Clause cannot be relied upon in the event of fraud on the part of the claimant or the insured. Hong Kong law will not support fraud, whatever a contract may say.
(c) Such a clause would not have the effect of preventing the insurer from raising the question of illegality, e.g. for lack of insurable interest.
(d) An Indisputable Clause (the UK equivalent of the Incontestability Provision) has been held by the English courts to be incapable of preventing an insurer from avoiding liability on grounds of negligent misrepresentation on the part of the insured unless the clause expressly mentions negligence or the clause does not otherwise make sense. - Question 2 of 30
2. Question
Which of the following about Grace Period are incorrect?
CorrectGRACE PERIOD
Under U.K. style policies, this is also called “Days of Grace”. Essentially, this relates to a period of time after the date on which a premium is due, when cover is kept operative. But for this grace period provision, the policy would lapse if the premium is not paid by the due date. So it allows for a late payment of premium without penaltyIncorrectGRACE PERIOD
Under U.K. style policies, this is also called “Days of Grace”. Essentially, this relates to a period of time after the date on which a premium is due, when cover is kept operative. But for this grace period provision, the policy would lapse if the premium is not paid by the due date. So it allows for a late payment of premium without penalty - Question 3 of 30
3. Question
In practice, there are various types of designations and beneficiaries, which include:
I. The beneficiary is usually named in the policy. But class designations cannot alternatively be done
II. The primary beneficiary receives the death benefit, when payable. if more than one is designated, shares will be equal unless otherwise specified in the policy
III. One or more Contingent Beneficiaries may be designated in addition to primary beneficiaries, in case all the primary beneficiaries do not survive the life insured.
IV. A life policy usually allows the policyowner to change the beneficiary designation whilst the policy is in force, in which case the designated beneficiary is called a “revocable beneficiary”.CorrectA beneficiary is a person to whom the policyowner of a life policy instructs the insurer to pay the death benefit when it is due. A fundamental condition for the payment is that the beneficiary must survive the life insured. In practice, there are various types of designations and beneficiaries:
(a) The beneficiary is usually named in the policy. But class designations (i.e. identification of a certain group of people as beneficiaries instead of naming each of the persons) can alternatively be done. Examples of class designation include “my children”, and “my brothers and sisters”.
(b) The primary (or first) beneficiary receives the death benefit, when payable (if more than one is designated, shares will be equal unless otherwise specified in the policy). One or more Contingent Beneficiaries may be designated in addition to primary beneficiaries, in case all the primary beneficiaries do not survive the life insured.
(c) A life policy usually allows the policyowner to change the beneficiary designation whilst the policy is in force, in which case the designated beneficiary is called a “revocable beneficiary”. Alternatively, he may have a provision included in the policy making the designation irrevocable so that a change of beneficiary will require the written consent of the current beneficiary. Turning back to the usual policy wording, which allows a beneficiary designation to be revoked, equity will not allow the act of naming a substitute beneficiary in such a policy to prejudice any vested, beneficial interest of the original beneficiary, even if such an act is strictly within the terms of the contract. For instance, effecting a life insurance policy for the benefit of the policyholder’s spouse and/or any of his or her children will have the effect of creating a (statutory) trust under the Married Persons’ Status Ordinance, so that the spouse and/or the children will become beneficial owners of the policy, with the policyowner as the trustee. Under the strong protection of equity, these beneficial interests can simply be viewed as gifts (or “gifts inter vivos”, to be more precise, with “inter vivos” meaning “among living people”) that even the donor (policyowner) himself cannot take back! This is because these interests are now parts of the respective estate of the beneficiaries, whether or not the beneficiaries will survive the life insured being irrelevant.
(d) The wording of the typical beneficiary designation provision is apparently simple, giving rise to a general belief that any payable death benefit will certainly be paid to the beneficiary. In fact, a situation of conflicting claims may arise, possibly from policy beneficiaries, assignees, trustees of the policy, trust beneficiaries, trustees-in-bankruptcy, and personal representatives. An insurer in such a situation will face the risk of having to pay claims twice by taking it for granted that the beneficiary designation provision is paramount.IncorrectA beneficiary is a person to whom the policyowner of a life policy instructs the insurer to pay the death benefit when it is due. A fundamental condition for the payment is that the beneficiary must survive the life insured. In practice, there are various types of designations and beneficiaries:
(a) The beneficiary is usually named in the policy. But class designations (i.e. identification of a certain group of people as beneficiaries instead of naming each of the persons) can alternatively be done. Examples of class designation include “my children”, and “my brothers and sisters”.
(b) The primary (or first) beneficiary receives the death benefit, when payable (if more than one is designated, shares will be equal unless otherwise specified in the policy). One or more Contingent Beneficiaries may be designated in addition to primary beneficiaries, in case all the primary beneficiaries do not survive the life insured.
(c) A life policy usually allows the policyowner to change the beneficiary designation whilst the policy is in force, in which case the designated beneficiary is called a “revocable beneficiary”. Alternatively, he may have a provision included in the policy making the designation irrevocable so that a change of beneficiary will require the written consent of the current beneficiary. Turning back to the usual policy wording, which allows a beneficiary designation to be revoked, equity will not allow the act of naming a substitute beneficiary in such a policy to prejudice any vested, beneficial interest of the original beneficiary, even if such an act is strictly within the terms of the contract. For instance, effecting a life insurance policy for the benefit of the policyholder’s spouse and/or any of his or her children will have the effect of creating a (statutory) trust under the Married Persons’ Status Ordinance, so that the spouse and/or the children will become beneficial owners of the policy, with the policyowner as the trustee. Under the strong protection of equity, these beneficial interests can simply be viewed as gifts (or “gifts inter vivos”, to be more precise, with “inter vivos” meaning “among living people”) that even the donor (policyowner) himself cannot take back! This is because these interests are now parts of the respective estate of the beneficiaries, whether or not the beneficiaries will survive the life insured being irrelevant.
(d) The wording of the typical beneficiary designation provision is apparently simple, giving rise to a general belief that any payable death benefit will certainly be paid to the beneficiary. In fact, a situation of conflicting claims may arise, possibly from policy beneficiaries, assignees, trustees of the policy, trust beneficiaries, trustees-in-bankruptcy, and personal representatives. An insurer in such a situation will face the risk of having to pay claims twice by taking it for granted that the beneficiary designation provision is paramount. - Question 4 of 30
4. Question
The features of Grace Period are:
I. the grace period apply to the initial premium for the policy;
II. the grace period is usually a minimum of 30 or 31 days;
III. this is not a period of free insurance;
IV. payment of premium within the grace period is deemed to be payment on timeCorrectGRACE PERIOD
Under U.K. style policies, this is also called “Days of Grace”. Essentially, this relates to a period of time after the date on which a premium is due, when cover is kept operative. But for this grace period provision, the policy would lapse if the premium is not paid by the due date. So it allows for a late payment of premium without penalty. The features of these provisions are:
(a) the grace period is usually a minimum of 30 or 31 days;
(b) the grace period does not apply to the initial premium for the policy;
(c) payment of premium within the grace period is deemed to be payment on time;
(d) this is not a period of free insurance; for example: (i) if the life insured dies within the grace period before payment of the premium, the premium due will be deducted from the death benefit payable; (ii) if the life insured survives the grace period without paying the premium due (and subject to any other policy provisions, such as nonforfeiture, see 4.5 below), a U.K. style policy will lapse from the date the premium was due, whereas a U.S. style policy will lapse at the end of the grace period (giving rise to “free insurance” for one month).
(e) special provisions may arise with non-traditional types of policy, e.g. universal life policy.IncorrectGRACE PERIOD
Under U.K. style policies, this is also called “Days of Grace”. Essentially, this relates to a period of time after the date on which a premium is due, when cover is kept operative. But for this grace period provision, the policy would lapse if the premium is not paid by the due date. So it allows for a late payment of premium without penalty. The features of these provisions are:
(a) the grace period is usually a minimum of 30 or 31 days;
(b) the grace period does not apply to the initial premium for the policy;
(c) payment of premium within the grace period is deemed to be payment on time;
(d) this is not a period of free insurance; for example: (i) if the life insured dies within the grace period before payment of the premium, the premium due will be deducted from the death benefit payable; (ii) if the life insured survives the grace period without paying the premium due (and subject to any other policy provisions, such as nonforfeiture, see 4.5 below), a U.K. style policy will lapse from the date the premium was due, whereas a U.S. style policy will lapse at the end of the grace period (giving rise to “free insurance” for one month).
(e) special provisions may arise with non-traditional types of policy, e.g. universal life policy. - Question 5 of 30
5. Question
Which of the following definitions are incorrect?
CorrectINCONTESTABILITY PROVISION – within the terms of these provisions the validity of the contract cannot be contested challenged by the insurer.
INSURABILITY – by normal underwriting and business standards a particular risk is acceptable for insurance.
LONG TERM CARE BENEFITS – a stated portion of the death benefit is payable to a policyowner-insured who requires constant care for a condition.
ACCELERATED DEATH BENEFITS – when a policyowner-insured in a prescribed serious situation, all or part of the death benefit under the policy may be payable to him, although death has not yet occurred.IncorrectINCONTESTABILITY PROVISION – within the terms of these provisions the validity of the contract cannot be contested challenged by the insurer.
INSURABILITY – by normal underwriting and business standards a particular risk is acceptable for insurance.
LONG TERM CARE BENEFITS – a stated portion of the death benefit is payable to a policyowner-insured who requires constant care for a condition.
ACCELERATED DEATH BENEFITS – when a policyowner-insured in a prescribed serious situation, all or part of the death benefit under the policy may be payable to him, although death has not yet occurred. - Question 6 of 30
6. Question
Which of the following about Nonforfeiture Benefits are incorrect?
CorrectNONFORFEITURE BENEFITS
Most conventional life insurance plans (other than term insurance plans) acquire a cash value after an initial period in force. That cash value is important for a number of reasons, discussed elsewhere in these Study Notes, and has special relevance to the question of nonforfeiture. If something is “forfeited”, it means that it is lost or rights to it are taken away. “Nonforfeiture” therefore means that rights are not lost under certain circumstances, in this instance the discontinuance of premium payments. Without specific provisions to the contrary, the policy will lapse if the premium is not paid within the grace periodIncorrectNONFORFEITURE BENEFITS
Most conventional life insurance plans (other than term insurance plans) acquire a cash value after an initial period in force. That cash value is important for a number of reasons, discussed elsewhere in these Study Notes, and has special relevance to the question of nonforfeiture. If something is “forfeited”, it means that it is lost or rights to it are taken away. “Nonforfeiture” therefore means that rights are not lost under certain circumstances, in this instance the discontinuance of premium payments. Without specific provisions to the contrary, the policy will lapse if the premium is not paid within the grace period - Question 7 of 30
7. Question
The customary nonforfeiture provision include:
I. the policyowner has a right to borrow money from the insurer
II. the policy does not lapse because of non-payment of premium.
III. the owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, could exercise cash surrender value
IV. When instructions are received to the contrary, the cash value of the policy is used to pay due premiums for as long as the cash value lasts, keeping the policy in force for the full amountCorrectThe customary nonforfeiture provision is that:
(a) the policy does not lapse because of non-payment of premium. Unless instructions are received to the contrary, the cash value of the policy is used to pay due premiums for as long as the cash value lasts, keeping the policy in force for the full amount; Note: Some insurers do not regard this as a nonforfeiture benefit, but treat it as a quite separate policy provision known as an automatic premium loan (APL) provision.
(b) the owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, may exercise any one of the following options:
(i) cash surrender value (also known as surrender value): the cash surrender value is paid when the policyowner terminates the policy;
(ii) reduced paid-up insurance: the net cash value is used as a single premium to purchase life insurance of the same plan as the original policy for a lower amount of cover;
(iii) extended term insurance: the net cash value is used as a single premium to purchase term insurance for the same amount as the original face amount, for such period as the net cash value can provide.
Note: These options arise when the insurer receives notice of a decision to discontinue premium payments. If premium payments merely stop, with no notice of selection from the policyowner, the automatic provision in (a) above, if any, will be triggered. Those policies that haveno such clause often provide that option (b)(iii) above should apply automatically if the policyowner has failed to choose one of the options.IncorrectThe customary nonforfeiture provision is that:
(a) the policy does not lapse because of non-payment of premium. Unless instructions are received to the contrary, the cash value of the policy is used to pay due premiums for as long as the cash value lasts, keeping the policy in force for the full amount; Note: Some insurers do not regard this as a nonforfeiture benefit, but treat it as a quite separate policy provision known as an automatic premium loan (APL) provision.
(b) the owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, may exercise any one of the following options:
(i) cash surrender value (also known as surrender value): the cash surrender value is paid when the policyowner terminates the policy;
(ii) reduced paid-up insurance: the net cash value is used as a single premium to purchase life insurance of the same plan as the original policy for a lower amount of cover;
(iii) extended term insurance: the net cash value is used as a single premium to purchase term insurance for the same amount as the original face amount, for such period as the net cash value can provide.
Note: These options arise when the insurer receives notice of a decision to discontinue premium payments. If premium payments merely stop, with no notice of selection from the policyowner, the automatic provision in (a) above, if any, will be triggered. Those policies that haveno such clause often provide that option (b)(iii) above should apply automatically if the policyowner has failed to choose one of the options. - Question 8 of 30
8. Question
One of the provision Nonforfeiture Benefits :the owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, may exercise any one of the following options:
I. reduced paid-up insurance: the net cash value is used as a single premium to purchase life insurance of the same plan as the original policy for a lower amount of cover
II. surrender value: the cash surrender value is paid when the policyowner terminates the policy
III. extended term insurance: the net cash value is used as a single premium to purchase term insurance for the same amount as the original face amount, for such period as the net cash value can provide.Correctthe owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, may exercise any one of the following options:
(i) cash surrender value (also known as surrender value): the cash surrender value is paid when the policyowner terminates the policy;
(ii) reduced paid-up insurance: the net cash value is used as a single premium to purchase life insurance of the same plan as the original policy for a lower amount of cover;
(iii) extended term insurance: the net cash value is used as a single premium to purchase term insurance for the same amount as the original face amount, for such period as the net cash value can provide.Incorrectthe owner of a policy which has a cash value or dividend value, who decides not to pay any more premiums, may exercise any one of the following options:
(i) cash surrender value (also known as surrender value): the cash surrender value is paid when the policyowner terminates the policy;
(ii) reduced paid-up insurance: the net cash value is used as a single premium to purchase life insurance of the same plan as the original policy for a lower amount of cover;
(iii) extended term insurance: the net cash value is used as a single premium to purchase term insurance for the same amount as the original face amount, for such period as the net cash value can provide. - Question 9 of 30
9. Question
Which of the following are the provision of Policy Loan?
I. the loan may be for any purpose
II. the loan may be up to the policy cash value
III. the policyowner has a right to borrow money from the insurer
IV. one of the security required for the loan is the policy cash valueCorrectthe customary Policy Loan provisions are:
(a) the policyowner has a right to borrow money from the insurer;
(b) the loan may be for any purpose;
(c) the loan may be up to the policy cash value (less one year’s loan interest);
(d) the only security required for the loan is the policy cash value;
(e) the applicable interest rate may be subject to a prescribed maximum;
(f) the amount and timing of any repayments are at the discretion of the policyowner, and any unpaid interests will become part of the policy loan;
(g) the amount of any outstanding loan (including any unpaid interests) will be deducted from the death benefit or surrender value that is payable.Incorrectthe customary Policy Loan provisions are:
(a) the policyowner has a right to borrow money from the insurer;
(b) the loan may be for any purpose;
(c) the loan may be up to the policy cash value (less one year’s loan interest);
(d) the only security required for the loan is the policy cash value;
(e) the applicable interest rate may be subject to a prescribed maximum;
(f) the amount and timing of any repayments are at the discretion of the policyowner, and any unpaid interests will become part of the policy loan;
(g) the amount of any outstanding loan (including any unpaid interests) will be deducted from the death benefit or surrender value that is payable. - Question 10 of 30
10. Question
Which of the following about reinstatement are incorrect?
CorrectREINSTATEMENT
Under U.K. life insurance practice, this is also known as “Policy Revival”. The concept is that a policy which has lapsed (“died”) can be brought back to “life” under certain circumstances. Of course, this can always happen by the mutual consent of the insurer and the policyowner. The term “reinstatement”, however, in this context concerns the right of the policyowner to have a lapsed policy brought back into force.IncorrectREINSTATEMENT
Under U.K. life insurance practice, this is also known as “Policy Revival”. The concept is that a policy which has lapsed (“died”) can be brought back to “life” under certain circumstances. Of course, this can always happen by the mutual consent of the insurer and the policyowner. The term “reinstatement”, however, in this context concerns the right of the policyowner to have a lapsed policy brought back into force. - Question 11 of 30
11. Question
Usual policy provisions which apply to reinstatement are:
I. the right normally will applies to surrendered policies
II. there is a time limit within which this may be demanded
III. that period during which the right can be exercised may vary between insurers
IV. the reinstatement may be subject to evidence of continued insurabilityCorrectThe usual policy provisions which apply to reinstatement are:
(a) there is a time limit within which this may be demanded;
(b) that period during which the right can be exercised may vary between insurers, but 5 years is quite representative;
(c) the right normally applies only to lapsed (not surrendered) policies;
(d) the reinstatement may be subject to any of the following conditions:
(i) evidence of continued insurability (good health);
(ii) repayment of any outstanding loan (inclusive of interests);
(iii) payment of back premiums, plus interests thereon to be charged at a prescribed rate;
(iv) payment of a reinstatement fee;
(v) a further contestable period (see 4.2) from the reinstatement date;
(vi) a further suicide exclusion period (see 4.12) from the reinstatement date.IncorrectThe usual policy provisions which apply to reinstatement are:
(a) there is a time limit within which this may be demanded;
(b) that period during which the right can be exercised may vary between insurers, but 5 years is quite representative;
(c) the right normally applies only to lapsed (not surrendered) policies;
(d) the reinstatement may be subject to any of the following conditions:
(i) evidence of continued insurability (good health);
(ii) repayment of any outstanding loan (inclusive of interests);
(iii) payment of back premiums, plus interests thereon to be charged at a prescribed rate;
(iv) payment of a reinstatement fee;
(v) a further contestable period (see 4.2) from the reinstatement date;
(vi) a further suicide exclusion period (see 4.12) from the reinstatement date. - Question 12 of 30
12. Question
The reinstatement may be subject to any of the following conditions, except:
Correctthe reinstatement may be subject to any of the following conditions:
(i) evidence of continued insurability (good health);
(ii) repayment of any outstanding loan (inclusive of interests);
(iii) payment of back premiums, plus interests thereon to be charged at a prescribed rate;
(iv) payment of a reinstatement fee;
(v) a further contestable period (see 4.2) from the reinstatement date;
(vi) a further suicide exclusion period (see 4.12) from the reinstatement date.Incorrectthe reinstatement may be subject to any of the following conditions:
(i) evidence of continued insurability (good health);
(ii) repayment of any outstanding loan (inclusive of interests);
(iii) payment of back premiums, plus interests thereon to be charged at a prescribed rate;
(iv) payment of a reinstatement fee;
(v) a further contestable period (see 4.2) from the reinstatement date;
(vi) a further suicide exclusion period (see 4.12) from the reinstatement date. - Question 13 of 30
13. Question
Which of the following about misstatement of age or sex are incorrect?
CorrectMISSTATEMENT OF AGE OR SEX
Please note that this is a misstatement of age or sex. In the event of a voluntary sex change operation to an existing life insured, the advice of the insurer concerned should be obtained. Obviously, a different age or sex from that indicated when the insurance was arranged can have a significant impact on the policy premium and/or benefit. The customary provisions in these circumstances are:
(a) If the error is discovered after a claim has arisen: the amount of the benefit payable is adjusted (up or down) to reflect the amount payable had the correct age/sex been given and the same premium paid.
Note: If the insurer follows the commonest practice in the U.K. on this issue, any benefit adjustment could only be downward. If the age/sex mistake indicates that too much premium has been paid, the overpaid premium will be refunded (without interest) without an upward adjustment to the benefit payable. Again, this might be a point to check with any insurer using U.K. policy forms, etc.
(b) If the error is discovered before a claim arises: the policyowner is usually given the choice of: (i) leaving the face amount unchanged and either receiving a refund premium or paying an extra premium after calculating the correct premium that should have been paid; or (ii) adjusting the face amount of the policy to the amount which the premium paid would have purchased at the correct age or sex. Note: The U.K. practice on this point will be the same.IncorrectMISSTATEMENT OF AGE OR SEX
Please note that this is a misstatement of age or sex. In the event of a voluntary sex change operation to an existing life insured, the advice of the insurer concerned should be obtained. Obviously, a different age or sex from that indicated when the insurance was arranged can have a significant impact on the policy premium and/or benefit. The customary provisions in these circumstances are:
(a) If the error is discovered after a claim has arisen: the amount of the benefit payable is adjusted (up or down) to reflect the amount payable had the correct age/sex been given and the same premium paid.
Note: If the insurer follows the commonest practice in the U.K. on this issue, any benefit adjustment could only be downward. If the age/sex mistake indicates that too much premium has been paid, the overpaid premium will be refunded (without interest) without an upward adjustment to the benefit payable. Again, this might be a point to check with any insurer using U.K. policy forms, etc.
(b) If the error is discovered before a claim arises: the policyowner is usually given the choice of: (i) leaving the face amount unchanged and either receiving a refund premium or paying an extra premium after calculating the correct premium that should have been paid; or (ii) adjusting the face amount of the policy to the amount which the premium paid would have purchased at the correct age or sex. Note: The U.K. practice on this point will be the same. - Question 14 of 30
14. Question
Which of the following about assignment are incorrect?
CorrectASSIGNMENT
Section 9 of the Law Amendment and Reform (Consolidation) Ordinance allows the assignment of a legal chose in action (see Glossary) by following a prescribed formality, with interests in an insurance contract constituting choses in action. Among the criteria for a valid legal assignment is one that the chose in action to be assigned must be present, not future; and it has been held that interests in a life insurance contract are present and are capable of assignment. As an alternative to the ‘present’ description, it is said that interests in a life insurance contract are reversionary, that is to say, even though the policyowner’s rights under the contract are unquestionably recognised, the actual enjoyment of the insurance is deferred until some date or event in the future. When an assignment happens or is attempted, the policyowner is termed the ‘assignor’ and the person on the other side of the deal the ‘assignee’. Assignment can be performed so as to execute a contract or a gift.IncorrectASSIGNMENT
Section 9 of the Law Amendment and Reform (Consolidation) Ordinance allows the assignment of a legal chose in action (see Glossary) by following a prescribed formality, with interests in an insurance contract constituting choses in action. Among the criteria for a valid legal assignment is one that the chose in action to be assigned must be present, not future; and it has been held that interests in a life insurance contract are present and are capable of assignment. As an alternative to the ‘present’ description, it is said that interests in a life insurance contract are reversionary, that is to say, even though the policyowner’s rights under the contract are unquestionably recognised, the actual enjoyment of the insurance is deferred until some date or event in the future. When an assignment happens or is attempted, the policyowner is termed the ‘assignor’ and the person on the other side of the deal the ‘assignee’. Assignment can be performed so as to execute a contract or a gift. - Question 15 of 30
15. Question
Which of the following are the features of assignment?
I. Rights of the assignee: the assignee inherits from the assignor all his rights and remedies upon a valid assignment.
II. Rights of the assignee: the assignor cannot recover more than the assignee, so that where an assignee has purchased insurance by fraud or misrepresentation, the insurer can set up a defence against the assignor.
III. Notice of assignment: an assignment is valid from the date of notice given to the insurer.
IV. Notice of assignment: A typical life insurance policy contains an assignment provision, which, without intending to prevent an assignment, says that the insurer is not bound to act in accordance with an assignment until it receives a written notice of it.CorrectCertain features of assignment that we should note, arising from policy provisions and otherwise, are as follows:
(a) Notice of assignment: an assignment is valid from the date of notice given to the insurer. A typical life insurance policy contains an assignment provision, which, without intending to prevent an assignment, says that the insurer is not bound to act in accordance with an assignment until it receives a written notice of it.
(b) Validity of an assignment: the said assignment provision disclaims insurer’s responsibility for this; this implicitly is saying that the assignor should seek independent legal advice on the formalities required for a valid assignment.
(c) Rights of the assignee: the assignee inherits from the assignor all his rights and remedies upon a valid assignment. However, the assignee cannot recover more than the assignor, so that where an assignor has purchased insurance by fraud or misrepresentation, the insurer can set up a defence against the assignee. Besides, the insurer can enforce against the assignee any of its right to set off against the assignor, so that when any policy benefit is payable to the assignee any overdue premiums from the assignor and outstanding policy loans to the assignor together with interests thereon will be deducted from the benefit, in which case the assignee is said to receive the net policy proceeds.
(d) Assignment is of benefit, not burden: the laws do not allow a person to assign to another person an obligation that he owes to a third person (e.g. an obligation to pay insurance premiums) without the third person’s consent.IncorrectCertain features of assignment that we should note, arising from policy provisions and otherwise, are as follows:
(a) Notice of assignment: an assignment is valid from the date of notice given to the insurer. A typical life insurance policy contains an assignment provision, which, without intending to prevent an assignment, says that the insurer is not bound to act in accordance with an assignment until it receives a written notice of it.
(b) Validity of an assignment: the said assignment provision disclaims insurer’s responsibility for this; this implicitly is saying that the assignor should seek independent legal advice on the formalities required for a valid assignment.
(c) Rights of the assignee: the assignee inherits from the assignor all his rights and remedies upon a valid assignment. However, the assignee cannot recover more than the assignor, so that where an assignor has purchased insurance by fraud or misrepresentation, the insurer can set up a defence against the assignee. Besides, the insurer can enforce against the assignee any of its right to set off against the assignor, so that when any policy benefit is payable to the assignee any overdue premiums from the assignor and outstanding policy loans to the assignor together with interests thereon will be deducted from the benefit, in which case the assignee is said to receive the net policy proceeds.
(d) Assignment is of benefit, not burden: the laws do not allow a person to assign to another person an obligation that he owes to a third person (e.g. an obligation to pay insurance premiums) without the third person’s consent. - Question 16 of 30
16. Question
Life insurers categorise assignment into different types, which include:
I. indemnity assignment
II. absolute assignment
III. collateral assignmentCorrectTypes of assignment: life insurers categorise assignment into two types: (i) absolute assignment: where all ownership rights under a life insurance contract are irrevocably assigned, such an assignment is termed an absolute assignment; (ii) collateral assignment: the arrangement is temporary, usually where the policy is used as collateral security for a loan (not from the insurer). The terms of such an assignment limit the assignee’s interest to the loan plus interests thereon, and give the assignor a right of reversion once the loan is repaid in full. The assignor is not entitled to acquire a policy loan or surrender the policy whilst a notified collateral assignment is in force.
IncorrectTypes of assignment: life insurers categorise assignment into two types: (i) absolute assignment: where all ownership rights under a life insurance contract are irrevocably assigned, such an assignment is termed an absolute assignment; (ii) collateral assignment: the arrangement is temporary, usually where the policy is used as collateral security for a loan (not from the insurer). The terms of such an assignment limit the assignee’s interest to the loan plus interests thereon, and give the assignor a right of reversion once the loan is repaid in full. The assignor is not entitled to acquire a policy loan or surrender the policy whilst a notified collateral assignment is in force.
- Question 17 of 30
17. Question
Assignment had limitations such as:
I. may be restricted to involve only a lump sum payment of policy benefit to the assignee
II. must not violate any vested right of any beneficiary
III. must not be for illegal purposes
IV. must not violate any vested right of irrevocable beneficiary onlyCorrectLimitations on assignment: an assignment (i) must not violate any vested right of any beneficiary (especially of any irrevocable beneficiary – one that cannot be changed without his consent). It is important to note that through a revocable beneficiary designation, what the designated beneficiary will acquire is a mere expectation to receive benefit, as opposed to a vested right or interest; (ii) must not be for illegal purposes (e.g. money laundering); 4/9 (iii) may be restricted to involve only a lump sum payment of policy benefit to the assignee, i.e. no other settlement options.
IncorrectLimitations on assignment: an assignment (i) must not violate any vested right of any beneficiary (especially of any irrevocable beneficiary – one that cannot be changed without his consent). It is important to note that through a revocable beneficiary designation, what the designated beneficiary will acquire is a mere expectation to receive benefit, as opposed to a vested right or interest; (ii) must not be for illegal purposes (e.g. money laundering); 4/9 (iii) may be restricted to involve only a lump sum payment of policy benefit to the assignee, i.e. no other settlement options.
- Question 18 of 30
18. Question
Policy normally presents some options in respect of cash dividends, so that they may be:
I. used to buy paid-up additional insurance, which will generate dividends as well
II. left with the insurer to earn interest
III. applied towards future premiums of the policyCorrectthe policy normally presents some options in respect of cash dividends, so that they may be: (a) paid in cash at once; (b) applied towards future premiums of the policy; (c) left with the insurer to earn interest (note: dividend deposit (inclusive of the interests thereon) is distinct from cash value); (d) used to buy paid-up additional insurance, which will generate dividends as well; (e) used to purchase one-year term insurance.
Incorrectthe policy normally presents some options in respect of cash dividends, so that they may be: (a) paid in cash at once; (b) applied towards future premiums of the policy; (c) left with the insurer to earn interest (note: dividend deposit (inclusive of the interests thereon) is distinct from cash value); (d) used to buy paid-up additional insurance, which will generate dividends as well; (e) used to purchase one-year term insurance.
- Question 19 of 30
19. Question
Participating policies (known in the U.K. as “with-profit” policies), in due time, should qualify for dividends, which are distributed in several ways, which include:
I. interest
II. cash dividend
III. reversionary bonus
IV. terminal bonusCorrectDIVIDEND OPTIONS Participating policies (known in the U.K. as “with-profit” policies), in due time, should qualify for dividends, which are distributed in three ways: cash dividend, reversionary bonus and terminal bonus (see 5.2.7).
IncorrectDIVIDEND OPTIONS Participating policies (known in the U.K. as “with-profit” policies), in due time, should qualify for dividends, which are distributed in three ways: cash dividend, reversionary bonus and terminal bonus (see 5.2.7).
- Question 20 of 30
20. Question
which of the following are settlement options?
I. an interest option
II. a lump-sum settlement
III. a fixed period option
IV. a life annuity optionCorrectSETTLEMENT OPTIONS
When the policy benefit becomes payable, the beneficiary and/or policyowner may choose between several alternative methods of receiving the proceeds (“settlement options” or “optional modes of settlement”). These are:
(a) a lump-sum settlement: a single payment, to complete the whole contract;
(b) an interest option: the policy proceeds are left with the insurer, who pays interest annually or at agreed more frequent intervals;
(c) a fixed period option: the policy proceeds (and interests) are paid in instalments of equal amounts over an agreed period of time – effectively this is an option of purchasing an annuity certain with the policy proceeds as a single premium;
(d) a fixed amount option: the insurer pays equal instalments of a stated amount for as long as the policy proceeds (and interests) last;
(e) a life income option: the policy proceeds (and interests) are paid in agreed instalments over the payee’s lifetime – effectively this is an option of purchasing a life annuity (see 2.3.1(c)) with the policy proceeds as a single premium. Under this method, the payee should expect smaller instalment payments than would be available under the fixed period or fixed amount option.IncorrectSETTLEMENT OPTIONS
When the policy benefit becomes payable, the beneficiary and/or policyowner may choose between several alternative methods of receiving the proceeds (“settlement options” or “optional modes of settlement”). These are:
(a) a lump-sum settlement: a single payment, to complete the whole contract;
(b) an interest option: the policy proceeds are left with the insurer, who pays interest annually or at agreed more frequent intervals;
(c) a fixed period option: the policy proceeds (and interests) are paid in instalments of equal amounts over an agreed period of time – effectively this is an option of purchasing an annuity certain with the policy proceeds as a single premium;
(d) a fixed amount option: the insurer pays equal instalments of a stated amount for as long as the policy proceeds (and interests) last;
(e) a life income option: the policy proceeds (and interests) are paid in agreed instalments over the payee’s lifetime – effectively this is an option of purchasing a life annuity (see 2.3.1(c)) with the policy proceeds as a single premium. Under this method, the payee should expect smaller instalment payments than would be available under the fixed period or fixed amount option. - Question 21 of 30
21. Question
Which of the following are incorrect?
CorrectSETTLEMENT OPTIONS
When the policy benefit becomes payable, the beneficiary and/or policyowner may choose between several alternative methods of receiving the proceeds (“settlement options” or “optional modes of settlement”). These are:
(a) a lump-sum settlement: a single payment, to complete the whole contract;
(b) an interest option: the policy proceeds are left with the insurer, who pays interest annually or at agreed more frequent intervals;
(c) a fixed period option: the policy proceeds (and interests) are paid in instalments of equal amounts over an agreed period of time – effectively this is an option of purchasing an annuity certain with the policy proceeds as a single premium;
(d) a fixed amount option: the insurer pays equal instalments of a stated amount for as long as the policy proceeds (and interests) last;
(e) a life income option: the policy proceeds (and interests) are paid in agreed instalments over the payee’s lifetime – effectively this is an option of purchasing a life annuity (see 2.3.1(c)) with the policy proceeds as a single premium. Under this method, the payee should expect smaller instalment payments than would be available under the fixed period or fixed amount option.IncorrectSETTLEMENT OPTIONS
When the policy benefit becomes payable, the beneficiary and/or policyowner may choose between several alternative methods of receiving the proceeds (“settlement options” or “optional modes of settlement”). These are:
(a) a lump-sum settlement: a single payment, to complete the whole contract;
(b) an interest option: the policy proceeds are left with the insurer, who pays interest annually or at agreed more frequent intervals;
(c) a fixed period option: the policy proceeds (and interests) are paid in instalments of equal amounts over an agreed period of time – effectively this is an option of purchasing an annuity certain with the policy proceeds as a single premium;
(d) a fixed amount option: the insurer pays equal instalments of a stated amount for as long as the policy proceeds (and interests) last;
(e) a life income option: the policy proceeds (and interests) are paid in agreed instalments over the payee’s lifetime – effectively this is an option of purchasing a life annuity (see 2.3.1(c)) with the policy proceeds as a single premium. Under this method, the payee should expect smaller instalment payments than would be available under the fixed period or fixed amount option. - Question 22 of 30
22. Question
Certain safeguards against the effecting of life insurance with suicide in mind are perfectly reasonable. The usual provisions are:
I. should suicide occur after that period, premiums paid (less any outstanding loan and interests) are refunded.
II. that period may vary with insurers, but 1 year after the date the policy is issued is very representative
III. should suicide occur during that period, the death benefit is not payable, but it is normal for the policy to state that premiums paid (less any outstanding loan and interests) are refunded.
IV. suicide is excluded for an initial period of the policyCorrectWith a long term contract and under those circumstances, it would be unfair to penalise the family in the tragic event of the life insured taking his own life. On the other hand, certain safeguards against the effecting of life insurance with suicide in mind are perfectly reasonable. The usual provisions are:
(a) suicide is excluded for an initial period of the policy;
(b) that period may vary with insurers, but 1 year after the date the policy is issued is very representative;
(c) should suicide occur after that period, the death benefit is payable as normal;
(d) should suicide occur during that period, the death benefit is not payable, but it is normal for the policy to state that premiums paid (less any outstanding loan and interests) are refunded.IncorrectWith a long term contract and under those circumstances, it would be unfair to penalise the family in the tragic event of the life insured taking his own life. On the other hand, certain safeguards against the effecting of life insurance with suicide in mind are perfectly reasonable. The usual provisions are:
(a) suicide is excluded for an initial period of the policy;
(b) that period may vary with insurers, but 1 year after the date the policy is issued is very representative;
(c) should suicide occur after that period, the death benefit is payable as normal;
(d) should suicide occur during that period, the death benefit is not payable, but it is normal for the policy to state that premiums paid (less any outstanding loan and interests) are refunded. - Question 23 of 30
23. Question
Under “The Entire Contract” provision, changes to the contract:
CorrectThe “entire contract” provisions are therefore very important. They provide that: (a) the entire contract consists of the policy, any attached riders and the attached copy of the application (such an insurance contract being termed a closed contract); (b) only certain specified senior officials of the company are authorised to make changes to the contract; (c) no change to the contract will be effective unless made in writing; and (d) no change to the contract can be made unless the policyowner agrees to it in writing
IncorrectThe “entire contract” provisions are therefore very important. They provide that: (a) the entire contract consists of the policy, any attached riders and the attached copy of the application (such an insurance contract being termed a closed contract); (b) only certain specified senior officials of the company are authorised to make changes to the contract; (c) no change to the contract will be effective unless made in writing; and (d) no change to the contract can be made unless the policyowner agrees to it in writing
- Question 24 of 30
24. Question
Before looking at the internal organisation of a typical life insurer, there are several important types of company which include:
I. Proprietary companies
II. Mutual insurance companies
III. stock companiesCorrectBefore looking at the internal organisation of a typical life insurer, however, we should just mention two important types of company, according to their constitutional basis:
Mutual insurance companies: a mutual insurance company has no shareholders. Legally, it is owned by its participating policyholders (i.e. owners of participating policies (see 1.3.1b(a))), and controlled by its Board of Directors and senior management. Being a mutual has certain advantages, especially for policyholders, who do not have to share company profits with shareholders. It has certain disadvantages as well, particularly with regard to the raising of new equity capital, should this be required. Note: The fact that a company has the word “Mutual” in its title is not conclusive evidence that it is a “mutual”, as defined above. Whilst this may well be the case, and all companies having “Mutual” in their title undoubtedly began as such a business unit, some “mutuals” world-wide have de-mutualised, changing their constitutional status, to become as below.
(b) Proprietary or stock companies: these companies are much more common business structures, consisting of a limited liability company owned by its shareholders. “Limited liability” means that the shareholders cannot be compelled to contribute anything further towards company losses or capital requirements once their shares are “fully paid-up”IncorrectBefore looking at the internal organisation of a typical life insurer, however, we should just mention two important types of company, according to their constitutional basis:
Mutual insurance companies: a mutual insurance company has no shareholders. Legally, it is owned by its participating policyholders (i.e. owners of participating policies (see 1.3.1b(a))), and controlled by its Board of Directors and senior management. Being a mutual has certain advantages, especially for policyholders, who do not have to share company profits with shareholders. It has certain disadvantages as well, particularly with regard to the raising of new equity capital, should this be required. Note: The fact that a company has the word “Mutual” in its title is not conclusive evidence that it is a “mutual”, as defined above. Whilst this may well be the case, and all companies having “Mutual” in their title undoubtedly began as such a business unit, some “mutuals” world-wide have de-mutualised, changing their constitutional status, to become as below.
(b) Proprietary or stock companies: these companies are much more common business structures, consisting of a limited liability company owned by its shareholders. “Limited liability” means that the shareholders cannot be compelled to contribute anything further towards company losses or capital requirements once their shares are “fully paid-up” - Question 25 of 30
25. Question
Which of the following about mutual insurance companies are incorrect?
CorrectMutual insurance companies: a mutual insurance company has no shareholders. Legally, it is owned by its participating policyholders (i.e. owners of participating policies (see 1.3.1b(a))), and controlled by its Board of Directors and senior management. Being a mutual has certain advantages, especially for policyholders, who do not have to share company profits with shareholders. It has certain disadvantages as well, particularly with regard to the raising of new equity capital, should this be required. Note: The fact that a company has the word “Mutual” in its title is not conclusive evidence that it is a “mutual”, as defined above. Whilst this may well be the case, and all companies having “Mutual” in their title undoubtedly began as such a business unit, some “mutuals” world-wide have de-mutualised, changing their constitutional status, to become as below.
IncorrectMutual insurance companies: a mutual insurance company has no shareholders. Legally, it is owned by its participating policyholders (i.e. owners of participating policies (see 1.3.1b(a))), and controlled by its Board of Directors and senior management. Being a mutual has certain advantages, especially for policyholders, who do not have to share company profits with shareholders. It has certain disadvantages as well, particularly with regard to the raising of new equity capital, should this be required. Note: The fact that a company has the word “Mutual” in its title is not conclusive evidence that it is a “mutual”, as defined above. Whilst this may well be the case, and all companies having “Mutual” in their title undoubtedly began as such a business unit, some “mutuals” world-wide have de-mutualised, changing their constitutional status, to become as below.
- Question 26 of 30
26. Question
“Limited liability” means that:
CorrectProprietary or stock companies: these companies are much more common business structures, consisting of a limited liability company owned by its shareholders. “Limited liability” means that the shareholders cannot be compelled to contribute anything further towards company losses or capital requirements once their shares are “fully paid-up”.
IncorrectProprietary or stock companies: these companies are much more common business structures, consisting of a limited liability company owned by its shareholders. “Limited liability” means that the shareholders cannot be compelled to contribute anything further towards company losses or capital requirements once their shares are “fully paid-up”.
- Question 27 of 30
27. Question
Standard functions of the Accounts Department include:
I. Payments: monitoring and recording all payments to be made by the company
II. Claims and reinsurance: calculations and projections of reserves and needs in these areas are obviously of great importance.
III. Receipts: monitoring and recording all payments due to the company
IV. Financial returns: every insurer must submit audited accounts each year, as required by the Insurance Ordinance.CorrectStandard functions of the Accounts Department include: (i) Receipts: monitoring and recording all payments due to the company, by way of premiums, reinsurance recoveries, loan repayments, etc. 5/2 (ii) Payments: monitoring and recording all payments to be made by the company, including claims, salaries, agency commissions, purchases, etc. (iii) Financial returns: every insurer must submit audited accounts each year, as required by the Insurance Ordinance. This is a major function and responsibility of the Accounts department.
IncorrectStandard functions of the Accounts Department include: (i) Receipts: monitoring and recording all payments due to the company, by way of premiums, reinsurance recoveries, loan repayments, etc. 5/2 (ii) Payments: monitoring and recording all payments to be made by the company, including claims, salaries, agency commissions, purchases, etc. (iii) Financial returns: every insurer must submit audited accounts each year, as required by the Insurance Ordinance. This is a major function and responsibility of the Accounts department.
- Question 28 of 30
28. Question
Accounts department may represent the relatively routine role of ( ), or (more likely) it will include Management Accounting, with responsibilities in the key areas of budgeting and investment
CorrectAccounts department: according to company policy and structures, an Accounts department may represent the relatively routine (but important) role of bookkeeping and financial record maintenance, or (more likely) it will include Management Accounting, with responsibilities in the key areas of budgeting and investment, etc.
IncorrectAccounts department: according to company policy and structures, an Accounts department may represent the relatively routine (but important) role of bookkeeping and financial record maintenance, or (more likely) it will include Management Accounting, with responsibilities in the key areas of budgeting and investment, etc.
- Question 29 of 30
29. Question
The actuarial department therefore has a key role in company operations, its involvement including:
I. Management reporting
II. Product pricing
III. Valuation
IV. Claims and reinsuranceCorrectActuarial department: as mentioned before, life insurance is profoundly involved with mathematical calculations and projections. The actuarial department therefore has a key role in company operations, its involvement including:
(i) Product pricing: probably sub-divided between the various major types of product offered, e.g. Individual Life, Group Life, Health, Personal Accident and Retirement Benefits.
(ii) Valuation: a core function, required by statute, valuation consists of the calculation of the values of assets and liabilities. The way this is done is critical to the solvency margin of the company and the determination of the divisible surplus, from which dividends or bonuses can be declared. (It is the Board of Directors that makes the actual decisions on declaration of dividends or bonuses.)
(iii) Claims and reinsurance: calculations and projections of reserves and needs in these areas are obviously of great importance.
(iv) Management reporting: this could be within the area of the company accounting staff, but whoever performs the function, it is a critical one. Unless top management are supplied with reliable data on reserves, surpluses and other key matters, effectively the company cannot operate (at least not efficiently, and that probably means “not for long”!).IncorrectActuarial department: as mentioned before, life insurance is profoundly involved with mathematical calculations and projections. The actuarial department therefore has a key role in company operations, its involvement including:
(i) Product pricing: probably sub-divided between the various major types of product offered, e.g. Individual Life, Group Life, Health, Personal Accident and Retirement Benefits.
(ii) Valuation: a core function, required by statute, valuation consists of the calculation of the values of assets and liabilities. The way this is done is critical to the solvency margin of the company and the determination of the divisible surplus, from which dividends or bonuses can be declared. (It is the Board of Directors that makes the actual decisions on declaration of dividends or bonuses.)
(iii) Claims and reinsurance: calculations and projections of reserves and needs in these areas are obviously of great importance.
(iv) Management reporting: this could be within the area of the company accounting staff, but whoever performs the function, it is a critical one. Unless top management are supplied with reliable data on reserves, surpluses and other key matters, effectively the company cannot operate (at least not efficiently, and that probably means “not for long”!). - Question 30 of 30
30. Question
Which of the following about VALUATION are incorrect?
CorrectValuation: a core function, required by statute, valuation consists of the calculation of the values of assets and liabilities. The way this is done is critical to the solvency margin of the company and the determination of the divisible surplus, from which dividends or bonuses can be declared. (It is the Board of Directors that makes the actual decisions on declaration of dividends or bonuses.)
IncorrectValuation: a core function, required by statute, valuation consists of the calculation of the values of assets and liabilities. The way this is done is critical to the solvency margin of the company and the determination of the divisible surplus, from which dividends or bonuses can be declared. (It is the Board of Directors that makes the actual decisions on declaration of dividends or bonuses.)