Paper 3 Long Term Insurance Quiz 23

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 MVA calculation is based on the insurer’s investment losses, not solely on expenses or commissions. Option D is incorrect because the disclosure for non-linked single premium policies is required before application, not after policy issuance.

This question tests the understanding of the ‘Cooling-off Period’ for life insurance policies in Hong Kong, as governed by the Hong Kong Federation of Insurers’ (HKFI) code of practice. The period is designed to protect consumers from potential high-pressure sales tactics. The key aspect is that the 21-day period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Options B, C, and D present incorrect triggers for the start of this period, such as the application date, the premium payment date, or the policy issue date without considering the delivery or notice aspect, which are common misconceptions.

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 intermediaries. An individual must be licensed by the IA to conduct regulated activities, such as advising on or arranging insurance contracts. The question highlights a scenario where an individual is acting as a referral agent for an insurance company without holding a proper license. This action constitutes a breach of the regulatory requirements, as only licensed intermediaries are permitted to engage in such activities. The other options are incorrect because while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business is the IA’s license. Furthermore, the Insurance Companies Ordinance does not exempt referral activities from licensing requirements if they involve advising on or arranging insurance. The Hong Kong Federation of Insurers is an industry association and does not issue licenses.

This question tests the understanding of decreasing term insurance and its application in covering a reducing debt. Mortgage redemption insurance is specifically designed to match the declining balance of a mortgage loan. As the borrower makes periodic payments, the outstanding loan amount decreases, and this type of insurance ensures the death benefit also decreases proportionally, providing coverage only for the remaining debt. Level term insurance would provide a fixed death benefit, which is not ideal for a reducing debt. Increasing term insurance, conversely, would see the death benefit rise, which is contrary to the purpose of covering a decreasing loan balance. While credit life insurance also covers loans, mortgage redemption insurance is a specific type of decreasing term insurance tailored for mortgages, often insuring the mortgagor’s interest to clear the debt.

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 Insurance Ordinance, 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 requisite insurable interest under Hong Kong law, making the contract void from its inception.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually, reflecting current conditions and future outlooks. This ensures policyholders receive accurate and relevant information regarding their participating policies, especially concerning the impact of changing investment return rates. The guideline emphasizes the need for a wider range of scenarios, including high and low return projections, when an investment strategy with higher volatility is employed, to help policyholders better assess potential outcomes.

The Standard Illustration for Participating Policies, as mandated by the Insurance Authority (IA) and promoted by the Hong Kong Federation of Insurers (HKFI), requires insurers to provide a summary illustration of benefits for participating policies. A key disclosure requirement is to clearly state that projected non-guaranteed benefits, such as dividends or bonuses, are based on current assumptions regarding investment returns and are not guaranteed. The actual amounts payable can fluctuate, potentially being higher or lower than illustrated. Furthermore, the illustration must include scenarios demonstrating the impact of different investment return rates (optimistic and pessimistic) on policy values. This ensures policyholders understand the variability and potential risks associated with non-guaranteed elements, aligning with the principle of providing fair and transparent information as per the Insurance Companies Ordinance (Cap. 41) and related regulatory guidelines.

This question tests the understanding of the fundamental role of the application form in the insurance process, particularly in relation to underwriting. The application serves as the primary source of information for the underwriter to assess the risk. Therefore, ensuring all material facts are accurately and completely disclosed is paramount. The intermediary’s role is to facilitate this accurate disclosure, not to alter or interpret the applicant’s statements. While client service and claims handling are crucial functions, they follow the underwriting decision, and marketing is a separate function aimed at generating business. The emphasis on the application being the ‘main, and sometimes virtually the only, source of information for underwriting purposes’ highlights its critical importance in the initial risk assessment phase.

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 a specific benefit rather than to compensate for a quantifiable loss. Therefore, life insurance contracts are generally considered benefit policies, not indemnity policies, making statement (iii) and (iv) accurate.

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.

This question assesses the understanding of the regulatory framework governing the distribution of investment products in Hong Kong, specifically focusing on the responsibilities of licensed corporations under the Securities and Futures Ordinance (SFO). The scenario highlights a situation where a licensed corporation is promoting a new fund. The core principle being tested is the obligation to ensure that all marketing materials are accurate, not misleading, and comply with relevant regulatory requirements. This includes ensuring that the information provided is balanced, fair, and provides sufficient detail for potential investors to make an informed decision. The SFC’s regulatory approach emphasizes investor protection, and licensed corporations are expected to have robust internal controls and compliance procedures to meet these standards. Option A is incorrect because while client suitability is crucial, the question specifically asks about the *marketing materials* themselves and their compliance with general regulatory standards for promotion, not just individual client suitability at the point of sale. Option C is incorrect because while record-keeping is a general regulatory requirement, it’s not the primary focus of ensuring the *content* of marketing materials is compliant. Option D is incorrect because while disclosure of fees is important, it’s a specific aspect of the overall requirement for accurate and non-misleading information, and the question is broader than just fee disclosure.

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 the necessary 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 promotion, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFSA) 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 insurance distribution.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) regulates the conduct of insurance intermediaries, specifically focusing on the requirement for intermediaries to disclose their remuneration. This disclosure is crucial for transparency and to ensure clients are aware of any potential conflicts of interest. The Insurance Authority (IA) mandates such disclosures to uphold market integrity and protect policyholders. The other options are incorrect because while intermediaries must act with due skill and care, and maintain proper records, the specific requirement to disclose remuneration is a direct mandate under the Ordinance to inform the client about the intermediary’s financial interest in the product being recommended.

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 these 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 to policyholders, making them more expensive upfront but potentially more valuable over the long term if the insurer performs well.

This question tests the understanding of the principle of indemnity in insurance. Indemnity aims to restore the insured to the financial position they were in before the loss occurred, without allowing for profit. Life insurance, however, is fundamentally different. The value of a human life is not quantifiable in monetary terms in the same way as property. Therefore, life insurance policies pay a predetermined sum upon the occurrence of a specified event (typically death), regardless of the actual financial loss incurred by the beneficiaries. This makes life insurance a ‘benefit’ policy rather than an indemnity policy. Statement (iii) correctly identifies that life insurance contracts are not normally subject to indemnity, and statement (iv) reinforces this by stating that indemnity does not typically apply to life insurance where benefit policies are prevalent. Therefore, both (iii) and (iv) are true.

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 the policy is issued, they are still covered if they were insurable at the application date. The scenario describes a situation where the applicant is found insurable, but on modified terms, meaning the initial offer was not accepted as is, and the contract only becomes effective upon agreement to the new terms.

Family Income Insurance is a type of decreasing term insurance. The core feature is that it provides a regular monthly benefit to a surviving spouse or dependent for a specified period after the insured’s death. This contrasts with a level term policy which pays a lump sum, or an increasing term policy where the benefit grows. While it offers a stream of income, it’s fundamentally designed to replace income lost due to death over a defined term, hence its classification as a variation of decreasing term insurance.

The question tests the understanding of the purpose and content of a benefit illustration document as mandated by Hong Kong insurance regulations. Section 5/23 (e) explicitly states that an Illustration Document must be prepared by the company in conjunction with each policy and provided to the prospective policyholder for review *prior* to signing the application form. This review process is crucial for informed decision-making. Option (a) is incorrect because while dividend history is relevant for reference, it’s not the primary purpose of the illustration itself, which focuses on projected benefits and premiums. Option (c) is incorrect as the illustration is for the prospective policyholder, not for internal company auditing. Option (d) is incorrect because while the illustration should reflect realistic future costs (like inflation), its primary function is not to provide a detailed economic forecast but to demonstrate policy performance under various scenarios.

This question tests the understanding of the regulatory framework governing the sale of investment products in Hong Kong, specifically focusing on the responsibilities of licensed corporations and their representatives. The Securities and Futures Ordinance (SFO) and its subsidiary legislation, such as the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), mandate that licensed individuals must act in the best interests of their clients. This includes ensuring that any investment recommendation is suitable for the client, taking into account their financial situation, investment objectives, knowledge, and experience. The scenario describes a situation where a representative is pushing a product without proper due diligence on the client’s suitability, which directly contravenes these regulatory principles. The other options represent incorrect interpretations of regulatory duties: while client confidentiality is important, it doesn’t override the suitability requirement; obtaining client consent for every minor transaction is not a universal mandate; and focusing solely on product features without considering client needs is a breach of duty.

The scenario describes a policyholder who has a Long-Term Care (LTC) rider attached to their life insurance policy. The question asks about the premium payment during the period when LTC benefits are being received. According to the provided syllabus, it is common for premiums to be waived for both the rider benefit and the basic insurance plan during the period that LTC benefits are being paid to the policyowner-insured. Therefore, the policyholder would not need to pay premiums for either the LTC rider or the main life insurance policy while receiving LTC benefits.

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 these policies compared to non-participating (NON-PAR) policies, which do not offer such a share in profits. The question tests the understanding of the fundamental difference in premium pricing between PAR and NON-PAR policies, directly relating to the concept of “PAR or NON-PAR” as a factor influencing life premium rating.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically concerning the “fit and proper” requirements. The Insurance Authority (IA) mandates that all licensed insurance intermediaries must continuously meet these criteria. This includes having the necessary knowledge, competence, and experience, being of good character, and possessing sound financial standing. The scenario describes an intermediary who has failed to maintain adequate professional indemnity insurance, which directly impacts their ability to operate responsibly and protect clients, thus potentially jeopardizing their “fit and proper” status. The relevant legislation and guidelines issued by the IA outline these ongoing obligations. Failure to comply can lead to disciplinary actions, including license suspension or revocation.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) emphasizes the importance of a robust underwriting process to ensure the financial stability of the insurer and fair treatment of policyholders. A key aspect of this is the accurate assessment of risk. When an applicant’s medical history reveals a pre-existing condition that is currently stable and well-managed, the underwriter’s primary responsibility is to determine if this condition significantly increases the probability of a claim beyond what is typically expected for the general population. This involves evaluating the nature of the condition, the effectiveness of the treatment, the applicant’s adherence to medical advice, and the potential for future complications. If the underwriter concludes that the risk associated with the pre-existing condition is manageable and can be adequately priced for, then offering a policy with a premium that reflects this assessed risk, without imposing an exclusion or loading, is a standard and appropriate underwriting decision. This approach aligns with the principle of underwriting to accept risks that can be fairly priced and managed, rather than automatically declining or heavily penalizing all applicants with past health issues.

This question tests the understanding of how a conditional premium receipt functions in life insurance. A conditional premium receipt signifies that coverage begins from the date of application, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but for different terms (e.g., a higher premium or reduced coverage), the contract does not commence until these revised terms are agreed upon. If the applicant becomes uninsurable or dies after applying but before a policy is issued, they are still covered if they were insurable at the time of application. Therefore, the statement that coverage is effective from the date of application, provided the applicant is insurable on standard terms, accurately reflects the conditions of a conditional premium receipt.

This question tests the understanding of premium waiver provisions in the context of Long-Term Care (LTC) benefits. The syllabus explicitly states that it is common for premiums to be waived for both the rider benefit 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 receiving benefits. Options B, C, and D describe scenarios that are not standard practice or are contrary to the typical design of such policies. For instance, continuing to pay premiums while receiving LTC benefits would negate a primary advantage of the waiver feature. Similarly, waiving premiums only for the rider or only for the basic plan, without considering both, would be an incomplete application of the waiver benefit as commonly understood.

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 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 is acting in contravention of the relevant legislation. The other options are incorrect because while insurance companies are regulated, the specific act described is a violation by the individual intermediary. The Hong Kong Federation of Insurers is a self-regulatory organization for insurers, not directly responsible for licensing individual intermediaries. The Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, which is a separate area of financial regulation.

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 question specifically asks about the outcome when the cash value is used to buy term insurance for the original face amount for as long as the cash value permits, which directly describes the extended term insurance option.

When an insurance office identifies potential twisting, the Code of Conduct mandates specific actions to protect the policyholder. A crucial step is to inform the client about the unprofessional sale and offer them the choice to cancel the new policy and receive a full premium refund, while also reinstating their original policy. This communication must clearly state the agent’s suspension and their inability to sell new life insurance, or the office’s cessation of accepting business from the involved broker’s representative. The client is then given a 30-day window to make this decision.

The question tests the understanding of the core components that determine life insurance premiums. Mortality rate is fundamental as it directly influences the probability of a claim. The interest rate is crucial because insurers invest premiums, and the returns generated offset premium costs. Expenses, including operational costs, commissions, and potential contingencies, must also be covered. The net premium, or pure premium, is calculated based on mortality and interest rates, and then a loading is added to account for expenses. Therefore, all three factors are essential for an adequate and equitable premium.

This question tests the understanding of the fundamental structure and ownership of a mutual life insurance company, as distinct from a proprietary (stock) company. In a mutual structure, the company is owned by its policyholders, who are entitled to share in the profits and dividends. Option (a) describes limited liability, which is a feature of many corporate structures but not the defining characteristic of mutual ownership. Option (b) describes ownership by shareholders, which is typical of proprietary companies. Option (d) is close but ‘legally owned’ can be interpreted in various ways; the core concept is the shared ownership and benefit derived from profits and dividends by the policyholders themselves, making option (c) the most accurate description of the mutual principle in practice.