Paper 3 Long Term Insurance Quiz 11

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the policy’s cash value. These deductions are specifically mentioned in the syllabus as adjustments for items like paid-up additions, outstanding policy loans and their accrued interest, and any advance premium payments. Therefore, the Net Cash Value is not simply the stated cash value but a reduced amount reflecting these financial adjustments.

This question assesses 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 licensing and regulating insurance intermediaries. Intermediaries must be licensed by the IA to conduct regulated activities. The Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, but not insurance intermediaries directly in their capacity as such. The Securities and Futures Commission (SCA) regulates the securities and futures markets. The Mandatory Provident Fund Schemes Authority (MPFA) regulates the Mandatory Provident Fund (MPF) system, which includes some insurance products, but the primary licensing body for insurance intermediaries is the IA.

The scenario highlights the principle of utmost good faith in insurance, specifically the applicant’s duty to disclose material facts. Even though the applicant underwent a medical examination, the insurer rescinded the policy because the examination did not fully reveal pre-existing conditions that were material to the risk. The Complaints Panel’s decision reinforces that submitting to a medical examination does not absolve the applicant of their disclosure obligations unless the examination is specifically designed to uncover all relevant medical history. The Personal Data (Privacy) Ordinance is also relevant, requiring insurers to explain the need for data gathering and inform individuals of test results, but it does not negate the applicant’s duty of disclosure under common law principles of insurance.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential to receive dividends means that the premiums charged for PAR policies are typically higher than those for non-participating (NON-PAR) policies, which do not offer this profit-sharing feature. The higher premium for PAR policies accounts for the possibility of future dividend payments to the policyholder, making them more expensive upfront compared to NON-PAR policies that do not have this feature.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Ordinance (Cap. 41) and the role of the Insurance Authority (IA). The scenario describes an individual acting as a broker without the necessary authorization. The Insurance Authority is the statutory body responsible for licensing and regulating insurance intermediaries. Therefore, any individual or entity conducting insurance intermediary business without a valid license from the IA is acting in contravention of the law. Options B, C, and D represent other regulatory bodies or concepts that are not directly responsible for the licensing of insurance intermediaries in Hong Kong.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential to receive dividends means that the premiums charged for PAR policies are typically higher than those for non-participating (NON-PAR) policies, which do not offer this profit-sharing feature. While dividends are not guaranteed, the expectation of receiving them influences the pricing structure, making PAR policies more expensive upfront to account for this potential benefit to the policyholder.

The level premium system, unlike the natural premium system, charges a premium that remains constant throughout the policy’s term. In the early years, this premium is higher than the actual cost of insurance, creating a surplus. This surplus, along with the interest earned on it, is used to build a reserve. This reserve effectively subsidizes the cost of insurance in later years when the natural cost would exceed the level premium. This mechanism allows for a predictable and stable premium for the policyholder over the long term, which is a key advantage over the escalating premiums of the natural premium system.

This question tests the understanding of how participating policies are illustrated, specifically concerning the treatment of bonuses. The Hong Kong Federation of Insurers (HKFI) provides a standard illustration format that separates guaranteed and non-guaranteed benefits. Non-guaranteed benefits, such as reversionary bonuses, are projected based on assumptions and are not guaranteed. Therefore, when illustrating a participating policy, it is crucial to clearly distinguish between the guaranteed components and the projected non-guaranteed components, including how bonuses are applied and their potential impact on the policy’s value over time. The illustration aims to provide a realistic, albeit projected, view of the policy’s performance, highlighting the variability of non-guaranteed benefits.

The question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the premium payment mode is annual. The provided text highlights that if premiums are waived on an annual basis, and the insured recovers after a short period of disability (e.g., 2 months), the waiver would continue for the full annual period, even though the insured is no longer disabled. This can lead to an undesirable situation where premiums are waived for a period the insured is capable of paying. To address this, some policies automatically switch to a monthly premium mode for waiver purposes, or explicitly disallow changes to premium frequency during disability. Therefore, the most accurate statement is that the policy might continue to waive premiums for the entire annual period even after recovery, unless specific provisions are in place to adjust this.

When a policy is issued with the notation “age not admitted,” it signifies that formal verification of the policyholder’s age was not provided at the policy’s inception. While some insurers might waive this requirement upon policy maturity, it is crucial to request proof of age. This is because any misstatement of age, even if not initially verified, can significantly alter the policy benefits payable, potentially leading to underpayment or overpayment of claims. This principle is rooted in ensuring the accurate calculation of premiums and benefits throughout the policy’s life, as mandated by insurance regulations designed to protect both the insurer and the policyholder.

The question tests the understanding of how companies can customize illustration documents according to regulatory guidelines. Section 5/23 (b) explicitly states that companies may exclude irrelevant information and include additional relevant information, provided it is not misleading and does not detract from the standard disclosures. Option A is incorrect because while companies can customize, they cannot omit information that is legally required or fundamentally alters the product’s representation. Option C is incorrect as the primary purpose of customization is to clarify and tailor the illustration, not to simplify it to the point of omitting crucial details. Option D is incorrect because the focus is on relevance and clarity, not solely on the aesthetic presentation of figures.

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 cash value. The projected cash value is a sum of the guaranteed cash value and accumulated non-guaranteed bonuses. Therefore, the projected cash value is derived from the guaranteed cash value plus the projected future bonuses. Option B is incorrect because it only considers guaranteed benefits and ignores the crucial non-guaranteed component. Option C is incorrect as it focuses solely on projected future bonuses, neglecting the guaranteed cash value. Option D is incorrect because it includes projected future premiums, which are not part of the calculation of the projected cash value itself, but rather a factor in determining future benefits.

This question assesses understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the responsibilities of licensed insurance agents and brokers under the Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation. The scenario highlights a common ethical dilemma where an agent might be tempted to misrepresent policy terms to secure a sale. The correct answer emphasizes the agent’s duty to act with integrity and provide accurate information, which is a fundamental principle of conduct for all licensed intermediaries. The other options represent actions that would contravene regulatory requirements and ethical standards, such as misleading clients, failing to disclose material information, or engaging in unauthorized activities.

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 solicit or transact insurance business. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding a 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. Therefore, the individual would be in contravention of the relevant provisions of the Insurance Companies Ordinance.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the assumed rates of return and their implications. According to the regulations, illustrations should be based on specific assumed rates of return, typically including 0%, 3%, 6%, and potentially 9% (Version 1). The key is that rates other than 0% are maximum rates, and insurers can opt to show lower rates. The statement about the relationship between the rate of return and policy termination, including the consequences of automatic early termination under adverse investment scenarios, is a mandatory disclosure. Option A correctly identifies the need to disclose the relationship between assumed rates and policy termination, including the impact of adverse scenarios and potential loss of premiums, which aligns with the regulatory requirements for illustration documents. Option B is incorrect because while surrender values and death benefits are illustrated, the specific phrasing about the impact of fees and charges on these values is part of a broader disclosure, not the sole focus of the mandatory statement regarding termination. Option C is incorrect as the illustration document is a summary and does not replace the policy document; it highlights the impact of fees and charges but the core requirement is about the performance assumptions and termination risks. Option D is incorrect because while a declaration is required, the specific content of the declaration is about confirming understanding and receipt of information, not about the insurer’s obligation to guarantee future performance.

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. 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 an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the licensing or regulatory landscape. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and consumer education, it is not the licensing authority. Option C is incorrect as the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. Option D is incorrect because while professional bodies may offer certifications, they do not grant the legal authority to act as an insurance intermediary in Hong Kong; that authority stems from the IA’s license.

The Illustration Document for Investment-linked Policies (Version 2) issued by the SFC mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the potential variability of returns and the level of certainty associated with different components of the policy. While other aspects like projected investment returns and policy charges are also important, the explicit separation of guaranteed versus non-guaranteed elements is a primary disclosure requirement to prevent misrepresentation and ensure informed decision-making.

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 scenario highlights a situation where a policyholder is seeking a refund outside the stipulated cooling-off period. According to the provided guidelines, insurance intermediaries (LIMs) are advised to maintain records of complaints or disputes where clients are refused refunds outside the cooling-off period. These records are to be provided to the Hong Kong Federation of Insurers (HKFI) upon request. Therefore, the intermediary’s primary responsibility in this specific situation, as per the advice given, is to ensure these records are maintained and available for potential submission to the HKFI.

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 scenario where an individual is soliciting insurance business without the necessary authorization. The relevant legislation mandates that any person who acts as an insurance agent or broker must be licensed by the IA. Failure to comply with this requirement can lead to penalties, including fines and imprisonment, as stipulated in the Ordinance. Therefore, the correct course of action for the individual is to cease such activities until a license is obtained.

A deferred annuity is a contract where the commencement of benefit payments is postponed to a future date, which is typically specified by a particular age or a set number of years after the policy’s inception. This contrasts with immediate annuities where payments begin shortly after purchase. The core characteristic is the deferral of income distribution.

This question assesses 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. Intermediaries, such as insurance agents and brokers, must be licensed by the IA to conduct regulated activities. The question highlights a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the regulatory requirements. The correct answer emphasizes the need for a valid license issued by the IA, as stipulated by the relevant legislation. The other options are incorrect because they refer to entities or processes not directly related to the initial licensing of an individual insurance intermediary or misrepresent the regulatory authority.

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 Federation of Insurers is an industry association, it does not issue licenses. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, 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.

Section 64A of the Insurance Ordinance (Cap. 41) in Hong Kong specifically grants an insurable interest to a parent or guardian in the life of a minor (a person under 18 years of age). While blood relationships like siblings or grandparents are generally recognized as establishing insurable interest in many jurisdictions, Hong Kong law, as stipulated in the provided text, limits this statutory extension to parents or guardians of minors. Therefore, a policy taken out by an aunt on her nephew’s life, without being his legal guardian, would not be considered to have the required insurable interest at inception, making the contract void from the beginning.

This question tests the understanding of how insurers classify risks for premium determination. A risk that presents no unusual health factors and can be insured at the standard rate based on age and sex is classified as a standard risk. Sub-standard risks require special considerations due to expected higher mortality. Declined risks are deemed uninsurable by the insurer. Preferred risks, while a recognized category by some insurers, represent an above-average risk profile warranting a discount, which is not the case described.

This question tests the understanding of how premiums are handled in a life insurance policy that has an age-related limitation for premium payments. The scenario describes a policy where premiums cease at age 65. If the policyholder dies before age 65, premiums are still payable up to the date of death. If the policyholder lives past age 65, no further premiums are due. Therefore, the total premiums paid would be the sum of premiums from the policy’s inception until the policyholder reaches age 65, assuming the policyholder survives to that age. This aligns with the concept of premiums being payable until the specified age limit is reached.

The question tests the understanding of the insurer’s obligations regarding the Market Value Adjustment (MVA) for single premium policies. According to the provided text, for non-linked single premium policies, potential policyholders must be made aware of the insurer’s right to apply an MVA before signing the application. This disclosure can be made via letter or within the product brochure. Option A correctly states this requirement. Option B is incorrect because while MVA applies to linked policies, the disclosure method for non-linked single premium policies is specific. Option C is incorrect as the disclosure for non-linked single premium policies is required before application, not after policy issuance. Option D is incorrect because the disclosure for non-linked single premium policies is not mandated to be on the application form itself, but rather through other means like a letter or brochure.

When replacing an existing life insurance policy with a new one, the insurance intermediary must meticulously document and explain various implications to the client. One crucial aspect is the potential for a new contestability period and suicide clause to commence with the new policy. This means that if a claim arises shortly after the replacement, it might be denied under the new policy’s terms, even if it would have been covered under the old one. The intermediary is obligated to obtain and record the expiry dates of these periods for both the existing and new policies, unless the client explicitly declines to provide this information. This ensures the client is fully aware of any potential gaps in coverage during the transition.

This question tests the understanding of the ‘Cooling-off Period’ in Hong Kong life insurance, as introduced by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. This ensures the policyholder has received the necessary documentation to make an informed decision. Options B, C, and D describe incorrect starting points for the Cooling-off Period, such as the application submission date, the policy issue date without delivery, or the premium payment date, none of which align with the HKFI’s code of practice.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the assumed rates of return. According to the regulations, illustrations should be based on a set of assumed rates, including 0%, 3%, 6%, and 9% (Version 1) or 0%, 3%, and 6% (Version 2). The key point is that rates other than 0% are maximum rates, and insurers have the discretion to illustrate lower rates. Option A correctly states that insurers can use lower rates than the specified maximums, provided they are not lower than 0%. Option B is incorrect because while 0% is a required rate, it’s not the only one, and the statement about it being the only rate that can be lower than specified is inaccurate. Option C is incorrect because the 9% rate is only applicable to Version 1 templates and not universally required. Option D is incorrect as the illustration must include all policy-level charges, not just those explicitly mentioned.