Paper 3 Long Term Insurance Quiz 10

A proprietary or stock company is owned by its shareholders, who have limited liability. This means their financial responsibility for the company’s debts or losses is capped at the amount they have invested in the company’s shares. Mutual companies, on the other hand, are owned by their participating policyholders and do not have shareholders. While the term ‘mutual’ in a company’s name might suggest its structure, it’s not definitive proof, as some mutuals have transitioned to proprietary structures.

The ‘Initiative on Financial Needs Analysis’ mandates that an FNA form must accompany applications for new life insurance policies falling under Class C or Class A of the Insurance Ordinance, with specific exclusions. These exclusions include term insurance, refundable policies for specific health coverages, yearly renewable critical illness/medical policies without cash value, and group policies. The question tests the understanding of these specific exclusions, requiring the candidate to identify which policy type would *not* require an accompanying FNA form according to the regulations.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over time to a designated recipient. This stream of payments is contingent upon the life of a specific individual (the annuitant) or a predetermined period. In exchange for these future payments, the insurer receives consideration, which can be a lump sum or a series of payments. The key elements are the insurer’s promise, the periodic payments, the designated recipient, the annuitant, and the consideration paid. Option A accurately captures these essential components, distinguishing it from other financial products or insurance riders.

The level premium system, as described, allows for an unchanging annual premium throughout the policy’s duration. This is achieved by charging a premium in the early years that is higher than the immediate risk of mortality, and using this surplus, along with investment earnings, to cover the increased risk in later years. This surplus effectively builds a reserve fund. In contrast, the natural premium system charges a premium that increases each year with the rising risk of mortality. The question asks about the consequence of the level premium system in its initial years. The excess premium collected in the early years, compared to the actual mortality risk, is used to build a reserve. This reserve is then available for policy loans, cash surrender values, and nonforfeiture options, which are features not typically found in a natural premium system. Therefore, the early years’ ‘excess’ premiums, along with interest, create a fund or reserve against future liabilities.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. Failure to obtain a license constitutes a breach of the law and can lead to penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and professional development, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the insurance sector.

The question tests the understanding of the Duty of Disclosure in insurance contracts, as stipulated by Hong Kong insurance regulations. This duty requires all parties to an insurance contract to reveal all material facts relevant to the risk being insured before the contract is concluded, regardless of whether these facts are specifically asked for. Failing to do so can render the contract voidable by the insurer. Option (b) describes a situation where an applicant withholds information about a pre-existing condition, which is a direct breach of this duty. Option (c) describes a situation related to dividend options, which is a separate aspect of policy management. Option (d) describes the concept of de-mutualisation, which pertains to the corporate structure of an insurer, not the applicant’s obligations. Therefore, withholding material facts about a pre-existing condition is the most direct example of a breach of the duty of disclosure.

When a selling office identifies potential twisting, it has a duty to investigate. If twisting is confirmed, the selling office must take several immediate actions. These include reporting the agent to the relevant registration body, suspending the agent from selling new life insurance, and clawing back commissions. Crucially, the selling office must also inform the client that they may have been sold a policy unprofessionally, offering them the option to cancel the new policy and reinstate the old one within 30 days. The client must also be informed of the agent’s suspension or the selling office’s refusal to accept business from the broker’s representative involved.

This scenario describes an applicant who has disclosed a history of a serious medical condition that requires further investigation. According to underwriting principles, when an applicant’s disclosed health information necessitates a deeper understanding of a specific condition, the underwriter would typically request a specialized medical questionnaire. This questionnaire is designed to gather detailed information about the particular illness or condition, allowing the underwriter to accurately assess the risk. Standard risks are those without abnormal features, declined risks are uninsurable, and preferred risks are those with above-average health prospects, none of which accurately describe this situation requiring further medical inquiry.

Renewable term insurance allows the policyholder to extend the coverage period without needing to provide new evidence of insurability. However, the premium for the renewed term is recalculated based on the insured’s attained age at the time of renewal. This means the premium will increase due to the older age. The question tests the understanding of how premiums are adjusted in renewable term policies, specifically linking the increase to the insured’s age rather than the original policy terms or a fixed increase.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. In such cases, the assignee’s rights are limited to the amount of the loan plus any accrued interest. The assignor retains the right to reclaim full ownership of the policy once the loan is fully repaid. Crucially, during the period of a collateral assignment, the assignor is typically restricted from exercising certain policy rights, such as taking out a policy loan or surrendering the policy, as these actions would diminish the value of the collateral.

This question tests the understanding of underwriting actions for substandard risks, specifically focusing on the concept of a ‘debt on policy’ or ‘lien’. The scenario describes an applicant with a medical condition that leads to an increased mortality risk. The insurer’s response of reducing the sum assured by a specific amount that decreases over time, while still offering coverage, aligns with the description of a decreasing debt. Option (b) describes loading the premium, which is a different method. Option (c) refers to specific exclusions, which is also a distinct underwriting action. Option (d) describes deferring a decision, which is a temporary measure and not a final underwriting decision.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and the purpose of the insurance policy. This includes assessing the client’s ability to afford the premiums over the policy’s duration and ensuring the policy aligns with their stated financial objectives and risk tolerance. Option (a) correctly identifies that a client’s capacity to sustain premium payments and the policy’s suitability for their financial goals are key considerations under these procedures. Option (b) is incorrect because while understanding the client’s occupation is part of KYC, it’s not the primary focus for assessing affordability and suitability in the context of long-term insurance. Option (c) is incorrect as the client’s marital status, while potentially relevant in some financial contexts, is not a primary driver for assessing the suitability and affordability of a long-term insurance policy under this guidance. Option (d) is incorrect because while the client’s investment experience is relevant for investment-linked products, the core KYC for long-term insurance, as per the guidance, focuses more broadly on financial capacity and policy alignment.

Family Income Insurance is a type of decreasing term insurance. The core feature is that it provides a regular monthly benefit to beneficiaries for a specified period after the insured’s death. This benefit is intended to replace the deceased’s income for a defined duration, supporting the family’s ongoing financial needs. Unlike a level term policy that pays a lump sum, or a whole life policy with a fixed death benefit, Family Income Insurance is designed to provide a stream of income over time, with the total payout decreasing as the benefit period progresses. The question tests the understanding of the fundamental payout structure and purpose of this specific insurance product.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual acts as an intermediary without the necessary authorization, which is a contravention of the law. The correct answer identifies the primary regulatory body responsible for issuing licenses and enforcing these provisions. Options B, C, and D represent other financial regulators or bodies that, while important in the financial sector, are not directly responsible for the licensing of insurance intermediaries under the Insurance Companies Ordinance.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because the Office of the Privacy Commissioner for Personal Data focuses on data privacy, which is a separate regulatory concern from the licensing of insurance intermediaries.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any attached endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the contract must be formally documented and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, it’s not the sole condition; the change must also be in writing and endorsed by the insurer. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but it’s not sufficient on its own. Option (d) is incorrect as senior officials’ say-so is irrelevant; the contract itself dictates the amendment process, which requires formal endorsement.

This question tests the understanding of how participating policies are illustrated, specifically focusing on the components that contribute to the projected value. The Hong Kong Federation of Insurers (HKFI) provides a standard illustration format for participating policies. This illustration typically includes guaranteed benefits, non-guaranteed benefits (bonuses), and the projected cash value. The projected cash value is a crucial element as it reflects the potential future value of the policy, influenced by both guaranteed and non-guaranteed components. Option A is incorrect because while premiums are paid, they are not directly illustrated as a component of the projected value in the same way as benefits and bonuses. Option C is incorrect because the surrender value is a specific benefit that may be paid upon policy termination, but the projected cash value encompasses the ongoing accumulation of value within the policy. Option D is incorrect because the policy loan amount is a feature available to policyholders, not a component of the projected value itself.

The scenario highlights the importance of accurately documenting and explaining the implications of replacing an existing life insurance policy with a new one. Specifically, the “twisting” provision, as defined in the context of the IIQE syllabus, refers to the practice of inducing a policyholder to lapse, forfeit, surrender, terminate, retain, or convert an existing policy to purchase a new policy, which is not in the best interest of the policyholder. The question tests the understanding of the intermediary’s responsibility when a policy replacement might lead to a new contestability period. If a policy is reinstated after a “twisting” incident, and the original policy is surrendered or lapsed during this process, the new insurer becomes responsible for any claims that arise during that period, subject to the new policy’s terms. This is a critical disclosure requirement to ensure the client is fully informed about the potential loss of benefits or altered coverage terms.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the application and any endorsements or amendments, represents the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of the written contract are legally binding. Therefore, any modifications or changes to the policy’s terms and conditions must be formally documented and agreed upon by both parties, typically through a written endorsement signed by an authorized representative of the insurer. Options (b), (c), and (d) suggest that changes can be made under less formal conditions or based on the unilateral actions of the policyowner or insurer officials, which contradicts the principle of the entire contract being the sole basis of the agreement.

The ‘Initiative on Financial Needs Analysis’ mandates that an FNA form must accompany applications for new life insurance policies falling under Class C or Class A of the Insurance Ordinance, with specific exclusions. These exclusions include term insurance, refundable policies for specific health coverages, yearly renewable non-cash value critical illness/medical policies, and group policies. Therefore, a policy that is a yearly renewable critical illness policy without cash value is exempt from the FNA requirement.

This question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the disability commences and ends within a premium payment cycle. The key concept is that if premiums are waived on an annual basis, and the insured recovers mid-year, the policy might continue to waive premiums for the remainder of that annual period, even though the insured is no longer disabled. This can lead to an undesirable situation where the policyholder receives benefits beyond the period of disability. To mitigate this, some policies automatically switch to a monthly premium mode for waiver purposes, or explicitly disallow changes to premium frequency during disability. Therefore, if a policy has an annual premium payment mode and the insured recovers after 25 days of disability, the waiver would typically continue until the end of the annual period, unless specific provisions for adjusting the waiver period or premium mode are in place. Option A correctly identifies this potential issue and the common solutions.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is responsible for licensing and regulating insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business. Failure to obtain a license before engaging in such activities constitutes a breach of the Ordinance and can lead to penalties. Options B, C, and D describe activities that might be performed by licensed individuals or entities but do not represent the fundamental requirement for an individual to be licensed to conduct insurance business.

The scenario describes a situation where a policyholder failed to disclose symptoms that were later diagnosed as nasopharyngeal carcinoma. The insurer sought to avoid the policy due to material non-disclosure. However, the Complaints Panel ruled in favour of the claimant. One of the key reasons for this ruling was the application of the incontestability provision. This provision, typically effective after a certain period (in this case, over two years), prevents an insurer from repudiating liability based on misrepresentation or non-disclosure, unless fraud can be proven. Since the policyholder died more than two years after the policy came into force and no evidence of fraud was presented, the incontestability provision shielded the policy from being avoided on the grounds of non-disclosure. The question tests the understanding of how the incontestability provision operates as a defence against claims of breach of utmost good faith, particularly when fraud is not involved.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. The question presents a scenario where an individual is providing advice on insurance products without holding the necessary authorization. This directly contravenes the provisions of the Ordinance which mandate that any person who solicits or accepts insurance business must be licensed. The other options are incorrect because while the Hong Kong Monetary Authority (HKMA) regulates financial institutions, its purview is primarily banking and related financial services, not insurance intermediaries. The Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, and the Securities and Futures Commission (SFC) regulates the securities and futures markets. Therefore, only the IA has the authority to license and regulate insurance intermediaries.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over a specified period or for the lifetime of an individual, in exchange for an upfront payment or a series of payments. The key elements are the periodic payments, the designated recipient (payee), the life or term upon which payments are based (annuitant), and the initial funding (annuity considerations). Option A accurately captures these essential components, distinguishing it from other financial products or insurance riders.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance intermediaries. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding the necessary license. This action constitutes a breach of the regulatory requirements, as referral activities that lead to the solicitation or transaction of insurance business are considered regulated activities requiring a license. Therefore, the individual is acting unlawfully.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the application and any endorsements or amendments, represents the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of the written contract are legally binding. Therefore, any modifications or changes to the policy’s terms and conditions must be formally documented and agreed upon by both parties, typically through a written endorsement signed by an authorized representative of the insurer. Options (b), (c), and (d) suggest that changes can be made under less stringent conditions, which contradicts the principle of the Entire Contract clause, as it emphasizes the exclusivity and finality of the written agreement.

A Conditional Premium Receipt provides temporary insurance coverage from the application date, contingent upon the applicant being found insurable on standard terms at the time of application. This means that if the applicant is later deemed uninsurable or requires a higher premium due to their health status at the time of application, the coverage provided by the receipt may not be valid or may be adjusted accordingly. The other options describe different aspects of insurance: a Cover Note is a temporary proof of insurance in general insurance, a Binding Premium Receipt is the life insurance equivalent of a Cover Note, and a Cooling-Off Period allows policyholders to cancel a policy within a specified timeframe.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over time to a designated individual. This stream of payments is in exchange for an upfront payment or a series of payments made by the contract holder. The payments are typically linked to the lifespan of a specific person, known as the annuitant, or a predetermined period. The key elements are the insurer’s promise, the periodic payments, the designated recipient, the annuitant’s life or a set term, and the consideration (payment) from the contract holder. Option A accurately captures these essential components, distinguishing it from other financial products.

This question tests the understanding of premium waiver provisions in the context of Long-Term Care (LTC) benefits. According to the syllabus, it is common for premiums to be waived for both the rider and the basic insurance plan during the period that LTC benefits are being paid to the policyowner-insured. This waiver is a key feature designed to alleviate the financial burden on the policyholder when they are actively utilizing the long-term care coverage. The other options describe scenarios that are not typically associated with premium waivers during LTC benefit payout periods. Option B describes a benefit that might be available under a medical plan but is not directly related to LTC premium waivers. Option C refers to a general exclusion in medical policies, not a waiver provision. Option D describes a feature of guaranteed insurability, which is unrelated to premium waivers during LTC benefit payments.