Paper 3 Long Term Insurance Quiz 21

The calculation of life insurance premiums is a complex process that considers several key factors to ensure the insurer can meet its future obligations. Mortality refers to the probability of death at various ages, which is fundamental to life insurance as it directly impacts the likelihood of a claim. Interest is crucial because premiums collected are invested, and the expected investment returns help offset the cost of benefits. Expenses, including acquisition costs, administrative overhead, and commissions, are also factored into the premium to cover the operational costs of the insurer. Morbidity, on the other hand, relates to the incidence of sickness or disability, which is primarily a concern for health and disability insurance, not the core calculation of life insurance premiums, although it might be relevant for certain riders.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensing and the role of the Insurance Authority (IA). The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with the guidelines issued by the IA, outline these requirements. An individual acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. The IA is the statutory body responsible for the supervision and regulation of the insurance industry in Hong Kong, ensuring market integrity and policyholder protection. Therefore, any individual seeking to solicit or advise on insurance business must obtain a license from the IA.

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.

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, risks, and costs. It is designed to facilitate informed decision-making by outlining projected investment performance, charges, and potential outcomes under various scenarios. 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 and the sale of investment products in Hong Kong.

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, which, depending on the nature and extent of the referral activities, could be construed as soliciting insurance business. Therefore, to ensure compliance with the Insurance Companies Ordinance and to avoid engaging in unlicensed regulated activities, the individual should seek a license from the IA. Options B, C, and D represent incorrect approaches. Seeking advice from a solicitor is good practice but does not substitute for the required licensing. Registering with a trade association is voluntary and does not confer regulatory authority. Obtaining a business registration certificate is a general requirement for any business operation in Hong Kong but does not specifically authorize the conduct of regulated insurance activities.

The question tests the understanding of the ‘adequate’ and ‘equitable’ principles in life insurance premium calculation. An adequate premium ensures the insurer has sufficient funds to meet its obligations, including paying benefits and covering operational costs. An equitable premium means that each policyholder pays an amount proportionate to the risk they represent and the benefits they are entitled to. The scenario describes a situation where a premium might be too low to cover future claims and expenses, directly violating the adequacy principle. While equity is also important, the primary concern highlighted is the insurer’s ability to meet its future financial commitments, which falls under adequacy.

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 breach of the regulatory requirements. Understanding the IA’s role and the necessity of a license for any person conducting insurance intermediary business is crucial for compliance. The other options represent incorrect interpretations of regulatory responsibilities or licensing procedures.

This question tests the understanding of the ‘extended term insurance’ non-forfeiture option. When a policyowner stops paying premiums, the accumulated net cash value can be used to purchase a term insurance policy. The key characteristic of this option is that the death benefit remains the same as the original face amount, but the coverage duration is limited by the amount of cash value available to pay the premiums for that term. The policy is not surrendered for cash, nor is it converted to a paid-up policy with a reduced face amount. The scenario describes a situation where the policyowner has ceased premium payments, and the insurer needs to apply a non-forfeiture option. Extended term insurance is the option where the original death benefit is maintained for a limited period.

The ‘entire contract’ provision in a life insurance policy is a fundamental clause that defines the complete agreement between the insurer and the policyowner. It clarifies that the policy document itself, along with any attached riders (endorsements or additions that modify the policy’s terms) and a copy of the application, constitutes the entirety of the contract. This provision is crucial because it prevents either party from later claiming that other verbal agreements or documents not included in the policy package are part of the contract. It ensures clarity and legal enforceability by establishing a definitive record of the agreed-upon terms. Options B, C, and D describe specific aspects of how changes to the contract can be made, but they do not define what constitutes the entire contract itself.

This question tests the understanding of the ‘extended term insurance’ non-forfeiture option. When a policyowner stops paying premiums, the accumulated net cash value can be used to purchase a term insurance policy. The key characteristic of this option is that the death benefit remains the same as the original face amount, but the coverage duration is limited by the amount of cash value available to pay the premiums for that term. The policy is not surrendered for cash, nor is it converted to a paid-up policy with a reduced face amount. The scenario describes a situation where the policyowner has ceased premium payments, and the insurer needs to apply a non-forfeiture option. Extended term insurance is the option where the original death benefit is maintained for a limited period.

The scenario describes a situation where an insurance agent recommends a new policy that significantly alters the terms of an existing policy, specifically by reducing the sum insured by more than 50%. According to the Insurance Code, a ‘replacement’ occurs when an existing life insurance policy’s sum insured is reduced by a substantial part (defined as 50% or more) within 12 months of a new policy being effected. The agent’s actions, by facilitating this reduction to induce the purchase of a new policy, fall under the definition of ‘replacement’. The Customer Protection Declaration (CPD) form is specifically designed to identify and document such replacements, requiring the intermediary to explain the implications to the policyholder. Therefore, the agent’s primary obligation is to ensure the CPD form accurately reflects this replacement and its consequences.

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 it to the insured’s age at renewal, which is a core feature of this product type as per the IIQE syllabus.

This question tests the understanding of how a conditional premium receipt functions in life insurance applications. A conditional receipt signifies that coverage begins from the application date, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but on different terms (e.g., higher premium, reduced coverage), the contract doesn’t commence until these revised terms are accepted. If the applicant becomes uninsurable or dies after applying but before policy issuance, they are still covered if they were insurable at the application date. The scenario describes a situation where the applicant is found insurable but with a higher premium, meaning the initial offer wasn’t accepted on its exact terms, and thus, coverage doesn’t start until the revised terms are agreed upon.

The question tests the understanding of the intermediary’s role in the application process, specifically concerning the disclosure of material facts. According to the syllabus, the application form is the primary source for underwriting, and intermediaries must ensure all material facts are disclosed. This includes providing full explanations for ‘Yes’ answers to health or other inquiries, along with relevant dates. Option (a) accurately reflects this responsibility by emphasizing the intermediary’s duty to ensure the applicant provides complete and accurate information, including necessary details for ‘Yes’ responses. Option (b) is incorrect because while the applicant completes the form, the intermediary’s role is to assist and ensure accuracy, not merely to witness. Option (c) is incorrect as the intermediary’s responsibility extends beyond just ensuring the form is signed; it involves the accuracy of the information provided. Option (d) is incorrect because the intermediary’s duty is to ensure all material facts are disclosed, not to decide which facts are material on behalf of the applicant.

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. Failing to obtain the necessary license constitutes a breach of the relevant legislation, leading to potential penalties. The other options represent incorrect regulatory bodies or incorrect legal frameworks that do not directly govern the licensing of insurance intermediaries in Hong Kong.

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 surrender value. The question asks about the elements that form the basis of these illustrations. Option A correctly identifies guaranteed benefits, projected non-guaranteed benefits (like reversionary bonuses and terminal bonuses), and the projected cash surrender value as the key components. Option B is incorrect because while expenses are a factor in pricing, they are not directly presented as a component of the projected value in the illustration itself. Option C is incorrect because the surrender value is a projected outcome, not a component that *forms* the basis of the illustration in the same way as benefits. Option D is incorrect because while the insurer’s financial strength is crucial for the business, it’s not a direct line item within the policy illustration’s projected values.

The Customer Protection Declaration Form, as outlined by the Hong Kong Federation of Insurers (HKFI), serves as a crucial document to ensure transparency and informed consent. It mandates that insurers must provide a clear and comprehensive declaration to customers, detailing specific aspects of the insurance product. This includes, but is not limited to, information about the product’s nature, its benefits, potential risks, fees, charges, and any other material information that could influence a customer’s decision. The primary objective is to empower customers by equipping them with all necessary details to make a well-informed choice, thereby upholding the principles of fair dealing and consumer protection within the insurance industry in Hong Kong. This aligns with regulatory expectations for disclosure and suitability.

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 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 Hong Kong Federation of Insurers (HKFI) is a self-regulatory organization for insurers, not a licensing authority for intermediaries. The Hong Kong Confederation of Insurance Brokers (HKCIB) is a self-regulatory organization for insurance brokers, but the ultimate licensing authority is the IA. The Mandatory Provident Fund Schemes Authority (MPFA) regulates the Mandatory Provident Fund (MPF) system, which is distinct from general insurance business.

This question assesses the understanding of the ‘Know Your Customer’ (KYC) principle as mandated by Hong Kong’s anti-money laundering and counter-terrorist financing (AML/CTF) regulations, specifically the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). The AMLO requires financial institutions and designated non-financial businesses and professions (DNFBPs) to implement robust KYC procedures to identify and verify their customers. This includes understanding the nature of the customer’s business, the purpose of the account, and the source of funds. Option A correctly identifies the core purpose of KYC as establishing and verifying customer identity and understanding the business relationship. Option B is incorrect because while risk assessment is part of the process, it’s not the primary objective of KYC itself. Option C is incorrect as reporting suspicious transactions is a separate but related obligation under AML/CTF laws, not the direct aim of KYC. Option D is incorrect because while record-keeping is essential, it’s a consequence of performing KYC, not its fundamental purpose.

The question tests the understanding of the ‘Duty of Disclosure’ in insurance contracts, a fundamental principle under Hong Kong insurance law. This duty requires all parties to a proposed insurance contract to reveal all material facts relevant to the risk being insured before the contract is concluded. Material facts are those that would influence a prudent insurer’s decision to accept the risk or the terms on which it would be accepted. Failing to disclose such facts, whether intentionally or unintentionally, can lead to the insurer voiding the policy. Option (a) accurately reflects this obligation by stating that all material facts must be revealed before the contract is finalized, regardless of whether they are specifically asked for. Option (b) is incorrect because while the insurer has a duty to provide information, the primary focus of the ‘Duty of Disclosure’ is on the proposer’s obligation to reveal facts. Option (c) is incorrect as the duty extends to all material facts, not just those that might increase the risk; it’s about influencing the insurer’s decision-making. Option (d) is incorrect because the duty applies to both parties, but the question specifically asks about the obligation to reveal information, which is most strongly associated with the proposer’s duty.

The scenario describes a situation where a life insurance policy is issued, and the policyholder has a specific timeframe to reconsider their purchase. The Cooling-off Initiative, as implemented by the Hong Kong Federation of Insurers (HKFI), grants policyholders a period to change their mind about a newly purchased individual life insurance policy. This period commences from the earlier of the policy’s delivery or the issuance of a notice to the policyholder or their representative. The duration of this period is 21 days. Therefore, if the policyholder receives the policy documents on the 1st of the month, the cooling-off period would end on the 22nd of that month, allowing them to cancel within this timeframe.

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 explains 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.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s survival. This distinguishes it from other annuity types that are contingent on life expectancy. The question tests the understanding of this core feature of an Annuity Certain, differentiating it from annuities that might have variable payout durations based on life events.

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, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual is acting as an intermediary without the necessary authorization, which is a contravention of the Ordinance. The correct answer emphasizes the need for a valid license issued by the IA to conduct insurance intermediary activities legally. The other options present incorrect or irrelevant regulatory bodies or concepts, testing the candidate’s knowledge of the specific regulatory authority and requirements.

The scenario describes a situation where an applicant for life insurance pays a premium, and the insurer issues a receipt. This receipt confirms that coverage begins immediately, but it is conditional. The condition is that the insurer must subsequently determine that the applicant was insurable on standard terms at the time of application. This type of receipt, which provides temporary coverage contingent on insurability, is known as a Conditional Premium Receipt. The other options represent different concepts: a Cover Note is typically used in general insurance for temporary proof of insurance, a Binding Premium Receipt is the closest equivalent in life insurance but the term ‘Conditional Premium Receipt’ is more precise for this specific scenario, and a Cooling-Off Initiative refers to a policyholder’s right to cancel a policy within a specified period.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. While affordability (option D) is a crucial factor in policy selection, the primary driver for purchasing life insurance is to fulfill a specific financial need or objective for beneficiaries. An intermediary’s role is to uncover these needs first, as this dictates the type and amount of coverage required. Commission (option B) is irrelevant to the policyholder’s needs. Questioning the necessity (option C) might be part of the process, but it’s secondary to understanding what the policyholder wants it to achieve. The question is framed to assess the intermediary’s client-centric approach, aligning with the principles of responsible financial advice as expected in the IIQE examinations.

The question tests the understanding of ‘Reversionary Bonus’ in the context of with-profits policies. A reversionary bonus is a bonus that is added to the sum assured and becomes a guaranteed part of the policy value. It is ‘reversionary’ because its full enjoyment or benefit is deferred until a future event, typically the maturity of the policy or the death of the insured. While it increases the policy’s value, it is not a cash payment made immediately upon declaration. Settlement options relate to how the final policy proceeds are paid out, and subrogation is a principle of indemnity not applicable to life insurance. A rider is an amendment to the policy, not a bonus.

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 insurer typically charges a higher premium for PAR policies compared to 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, making them more expensive upfront. While both types of policies are subject to mortality risk and expenses, the inclusion of a profit-sharing mechanism is the primary driver for the premium differential.

The question tests the understanding of ‘Reversionary Bonus’ in the context of with-profits policies. A reversionary bonus is a bonus that is added to the sum assured and becomes a guaranteed part of the policy value. It is ‘reversionary’ because its full enjoyment is deferred until a future event, typically the maturity or death claim of the policy. While it increases the policy’s value, it is not a cash payment available at any time. Settlement options relate to how the final proceeds are paid, not the nature of bonuses. Subrogation is a principle applicable to indemnity insurance, not life insurance. A rider is an amendment to a policy, not a type of bonus.

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). This statutory provision extends the concept of insurable interest beyond immediate blood relations like spouses, parents, children, grandparents, and grandchildren, which are generally recognized in other jurisdictions. Therefore, a policy taken out by a parent on the life of their minor child is legally valid due to this specific legislative provision.