Paper 3 Long Term Insurance Quiz 12

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 Ordinance (Cap. 41) and related guidelines issued by the Insurance Authority (IA). The scenario highlights a common ethical dilemma where an intermediary might be tempted to offer incentives beyond what is permitted to secure business. The Insurance Ordinance and the IA’s guidelines on conduct and business practices strictly prohibit the offering of inducements that are not disclosed or are considered excessive, as these can distort competition and mislead consumers. Licensed intermediaries are expected to act with integrity and in the best interests of their clients, which includes adhering to all regulatory requirements regarding commissions, rebates, and other forms of inducements. Offering a substantial cash rebate not disclosed to the insurer or the client, and not in line with IA guidelines, would constitute a breach of these regulations, potentially leading to disciplinary action.

This question tests the understanding of how the Guaranteed Insurability (GI) benefit operates in relation to policy changes. The core principle of a GI benefit is the ability to purchase additional coverage without providing new evidence of insurability. However, this right is typically tied to specific trigger events or dates and is not an automatic increase. If a policyowner chooses not to exercise this right when a trigger event occurs, that specific opportunity to purchase additional coverage without underwriting is forfeited. While the policy might continue, the missed opportunity for that particular increase remains lost. The other options describe scenarios that are either incorrect interpretations of the GI benefit (automatic increases, unlimited increases, or guaranteed premium reductions) or are not directly related to the exercise of the GI option itself.

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 the need to verify the client’s financial capacity and the policy’s suitability, which are core KYC principles in this context. Option B is incorrect because while understanding the client’s background is part of KYC, it’s the financial aspect and policy suitability that are paramount for long-term insurance. Option C is incorrect as the focus is on the client’s financial capacity and policy alignment, not solely on the insurer’s profitability. Option D is incorrect because while identifying potential money laundering risks is a component of KYC, the primary driver for long-term insurance is ensuring the policy meets the client’s needs and they can sustain it financially.

This question tests the understanding of the fundamental structure and ownership of a mutual life insurance company, as distinct from a proprietary company. In a mutual structure, the company is owned by its policyholders, and any profits or surplus are typically distributed among them, often in the form of dividends or reduced premiums. Option (b) describes a proprietary company owned by shareholders. Option (c) is partially correct in that policyholders may share in profits, but it’s not the defining characteristic of ownership. Option (a) is incorrect because while policyholders benefit from the mutual structure, the concept of ‘limited liability’ as applied to shareholders in a proprietary company doesn’t directly translate to policyholders in the same way; their primary relationship is one of ownership and benefit, not necessarily limited financial liability in the corporate sense.

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, which is a contravention of the Ordinance. The correct answer identifies the primary regulatory body responsible for enforcing these licensing requirements. Options B, C, and D represent other significant financial regulators or bodies in Hong Kong, but they are not directly responsible for the licensing and supervision of insurance intermediaries under the Insurance Companies Ordinance.

Family Income Insurance is a type of decreasing term insurance. The core feature is that it provides a regular monthly benefit to the beneficiary for a specified period after the insured’s death. This benefit is intended to replace a portion of the deceased’s income for the surviving family members. Unlike a level term policy that pays a lump sum, or a whole life policy with a fixed death benefit, Family Income Insurance’s payout structure is designed to provide ongoing financial support over a defined duration, mimicking a continued salary stream.

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, which is a contravention of the Ordinance. The correct answer identifies the primary regulatory body responsible for issuing licenses and enforcing compliance within the insurance sector. Options B, C, and D represent other financial regulators or bodies that, while important in the broader financial landscape, are not directly responsible for licensing insurance intermediaries.

A mutual insurance company is legally owned by its participating policyholders, meaning they have a claim on the company’s profits and assets. This structure contrasts with proprietary companies, which are owned by shareholders. While the presence of ‘Mutual’ in a company’s name might suggest this structure, it’s not definitive proof, as some companies have transitioned from mutual to proprietary status. The key differentiator is the ownership structure and the distribution of profits.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the tiered payout system. Option A correctly identifies that a policy usually pays a reduced benefit for the loss of one limb or eye, compared to the full benefit for the loss of two limbs or both eyes. Option B is incorrect because while the loss of use is often covered, it’s not the primary distinction for a lower benefit; the number of limbs/eyes affected is. Option C is incorrect as the policy typically pays *either* the dismemberment benefit *or* the accidental death benefit, not both, in the event of an accident causing both. Option D is incorrect because the definition of dismemberment in this context specifically includes loss of sight, not just physical severance.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this erosion of purchasing power. The Cost of Living Adjustment (COLA) rider is explicitly designed to periodically increase disability income benefits in line with a recognized independent index, such as the Composite Consumer Price Index. This ensures that the real value of the benefits paid to a disabled policyholder keeps pace with inflation over time. Options B, C, and D describe other rider functionalities or concepts that are not directly related to adjusting benefits for inflation. A Waiver of Premium rider addresses premium payments during disability, a Specified Event rider allows for customization of insured events, and a Temporary Cover provision offers additional term insurance during an option exercise period.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums if they become totally disabled. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it assumes the premium payment responsibility on behalf of the disabled policyowner-insured. Therefore, the policy continues to function normally, including the accrual of cash value and participation in dividends if it’s a participating policy.

The question tests the understanding of the principle of indemnity and its application to different types of insurance. The principle of indemnity aims to restore the insured to the financial position they were in before the loss occurred, preventing them from profiting from an insurance claim. Life insurance, however, is not typically subject to this principle. In life insurance, the sum assured is a pre-agreed amount that is paid upon the occurrence of the insured event (death or survival to a certain age), regardless of the actual financial loss incurred. Therefore, it is permissible and common for an individual to hold multiple life insurance policies, and each insurer is obligated to pay the full sum assured under their respective policies. This contrasts with general insurance (like property or motor insurance), where the principle of indemnity applies, and multiple policies would lead to a pro-rata distribution of the claim payout to avoid over-indemnification.

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 fundamental structure and ownership of a mutual life insurance company. In a mutual company, the policyholders are the owners. This ownership structure means that policyholders share in the profits and dividends of the company, as these profits are distributed among the owners. Option (a) is incorrect because while shareholders in a stock company have limited liability, mutual companies are owned by policyholders, not shareholders. Option (b) is incorrect because mutual companies are owned by policyholders, not shareholders. Option (d) is incorrect because while policyholders own the company, the statement that they share *equally* in profits and dividends is not always true; distribution is typically based on the policy’s performance and the company’s dividend policy, not necessarily an equal split among all policyholders. The core concept is that policyholders are the owners and benefit from the company’s success.

The question tests the understanding of the minimum requirements for an illustration document, specifically concerning the assumed rates of return. According to the provided text (Section 5/17 (a) (i)), Version 1 of the illustration template requires four different assumed rates of return: 0%, 3%, 6%, and 9%. Version 2 uses 0%, 3%, and 6%. The question asks about the number of assumed rates for Version 1. Therefore, the correct answer is four.

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 discovered later, can significantly alter the policy benefits, potentially leading to underpayment or overpayment of claims or maturity proceeds. This aligns with the principle of accurate risk assessment and fair benefit calculation in insurance contracts.

This question tests the understanding of the regulatory framework governing the sale of investment products in Hong Kong, specifically focusing on the role of the Securities and Futures Commission (SFC) and the licensing requirements for individuals and corporations. The scenario describes an individual soliciting investments without the necessary authorization, which directly contravenes the Securities and Futures Ordinance (SFO). The SFC is the primary regulator responsible for licensing and enforcing these provisions. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, the SFC is the primary regulator for securities and futures activities. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general investment products. Option D is incorrect because the Insurance Authority (IA) regulates insurance products, not the broader spectrum of investment products described.

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 not disabled. Some policies address this by automatically switching to a monthly premium mode for waiver purposes, or by disallowing 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.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, the final decision-making authority rests with the board. The guideline also emphasizes the need for a corporate policy on surplus allocation and dividend declarations, approved by the board and available to the IA.

The Illustration Document for Investment-Linked Policies (ILPs) is a crucial disclosure document mandated by the Securities and Futures Commission (SFC) to provide prospective policyholders with a clear and comprehensive understanding of the policy’s features, benefits, and risks. It is designed to facilitate informed decision-making by outlining projected investment returns, charges, and the potential impact of various scenarios on the policy’s value. The document serves as a vital tool for ensuring transparency and consumer protection in the sale of ILPs, aligning with the regulatory framework governing financial advisory services in Hong Kong.

A mutual insurance company is legally owned by its participating policyholders, not by shareholders. This structure means that any profits generated by the company are typically distributed among these policyholders, often in the form of dividends or bonuses, rather than being paid to external shareholders. Proprietary or stock companies, conversely, are owned by shareholders who invest capital in exchange for ownership and potential profits.

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 acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. Failure to obtain the necessary license constitutes a breach of the law and can lead to penalties. The other options represent entities or concepts that are not directly responsible for issuing individual licenses to insurance intermediaries or are not the primary regulatory body for this purpose.

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 is to reduce the sum assured by a specific amount that decreases over time. This directly aligns with the description of a ‘debt on the policy’ which is used when the excess mortality is temporary and decreasing. Loading the premium is another common method, but it increases the cost, not reduces the sum assured. Declining coverage is a refusal to insure, which is not what happened here. Deferring a decision is for temporary adverse conditions, and while the condition might be temporary, the underwriting action described is a specific adjustment to the policy terms, not a postponement of the decision.

The Illustration Document for Investment-linked Policies (Version 2) mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the potential outcomes of their investment, separating what is assured from what is projected based on market performance. The document emphasizes transparency regarding the underlying assumptions used in projecting non-guaranteed benefits, such as the projected investment returns and the allocation of policy charges. Therefore, a clear demarcation between guaranteed and non-guaranteed components is a fundamental requirement for accurate and responsible illustration.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The primary goal of life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, an intermediary should first ascertain what financial needs the insurance is intended to meet, such as income replacement, debt coverage, or legacy planning. Option (a) is too narrow, focusing only on the amount of money the client possesses, which doesn’t directly address the purpose of the insurance. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a subjective question that doesn’t elicit specific information about the client’s financial objectives. Option (d) is important but secondary to understanding the ‘why’ behind the insurance need.

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 a valid insurable interest under this specific provision, making the contract void from its inception.

This question tests the understanding of the principle of indemnity in insurance, specifically its application to life insurance. Indemnity aims to restore the insured to the financial position they were in before the loss, without allowing for profit. Life insurance, however, pays a predetermined sum upon the occurrence of a specific event (death), regardless of the precise financial loss incurred by the beneficiaries. This is because the value of a human life is considered immeasurable in financial terms, and the purpose is to provide financial support or compensation for the loss of that life, not to indemnify a specific financial deficit. Therefore, life insurance contracts are generally considered benefit policies rather than indemnity policies, making statement (iii) and (iv) accurate.

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. Some policies address this by automatically switching to a monthly premium mode for waiver purposes, or by disallowing 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 replacing a life insurance policy, the insurance intermediary must ensure that the client is fully informed about potential changes in policy provisions. A key implication of a new policy is the potential for a new contestability period to begin. This period, typically two years from the policy’s issue date, allows the insurer to investigate and potentially deny claims if material misrepresentations were made during the application process. If the existing policy had a shorter or no remaining contestability period, initiating a new one with the replacement policy could disadvantage the policyholder, as a claim arising early in the new policy’s term might be denied even if it would have been covered under the old policy. Therefore, the intermediary must explain this and obtain the expiry dates of both the existing and new policies’ contestability periods.

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, if they involve soliciting or transacting insurance business, require a license. The relevant legislation, the Insurance Companies Ordinance, mandates this licensing. Therefore, the individual is acting in contravention of the law.