Paper 3 Long Term Insurance Quiz 24

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 in Hong Kong. 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, which mandates licensing for such activities. The other options are incorrect because while an insurance company is regulated, the specific issue here is the unlicensed activity of 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.

Family Income Insurance is a type of decreasing term insurance. The core feature is that it provides a regular monthly benefit to beneficiaries for a specified period after the insured’s death. This benefit is intended to replace the deceased’s income for a defined duration, supporting the family’s ongoing financial needs. Unlike a standard decreasing term policy that might pay a lump sum that reduces over time, Family Income Insurance is structured to pay a stream of income. The question tests the understanding of this specific payout structure and its purpose as a variation of term insurance.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the projected surrender values and death benefits. According to the regulations, an illustration must present these values at the end of the first five years and every fifth year thereafter. It also mandates the inclusion of specific prescribed statements to inform the policyholder about the nature of the illustration and the risks associated with early termination or premium cessation. Option (a) correctly identifies the requirement to show values at specific intervals and includes the necessary cautionary statements. Option (b) is incorrect because while surrender values and death benefits are required, the specific intervals mentioned are not the complete requirement. Option (c) is incorrect as it omits the crucial prescribed statements and the specific intervals for showing values. Option (d) is incorrect because it focuses only on the surrender values and neglects the death benefits, and also misses the specific timeframes and cautionary statements.

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. Answering ‘What do you want the insurance to do for you?’ helps the intermediary understand the client’s goals, such as income replacement, debt coverage, or legacy planning, which then informs the appropriate type and amount of coverage. Option A is too broad and doesn’t directly address the purpose. Option B is self-serving for the intermediary and irrelevant to the client’s needs. Option C, while related to need, is less proactive than understanding the desired outcome.

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 required to maintain records of complaints or disputes where clients are refused refunds outside the cooling-off period and must provide these records to the Hong Kong Federation of Insurers (HKFI) upon request. This ensures transparency and allows for oversight of such cases.

The scenario describes a situation where an insurance agent recommends a new policy that results in a higher annual premium for the same sum insured. According to the Customer Protection Declaration (CPD) Form requirements, when a new policy attracts a higher annualized premium for the same sum insured compared to the existing policy, the insurance intermediary must provide a written justification for this difference. This is a crucial aspect of preventing ‘twisting’ by ensuring transparency and informed decision-making for the policyholder.

The CIB’s Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) emphasizes that CIB Members must conduct a thorough assessment of a client’s financial situation and existing insurance policies before recommending new or additional long-term insurance. This includes understanding their financial commitments, income, needs, and priorities. If a client already has a long-term policy that is in force, paid-up, suspended, or under a premium holiday, the CIB Member must first advise on appropriate options within that existing policy that align with the identified needs. Only after considering these existing arrangements should a recommendation for a new or additional policy be made. This ensures that the client’s current financial arrangements are optimized and that new recommendations are truly necessary and suitable.

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

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the terms of the contract must be made in writing and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, the clause itself dictates that changes must be written, not just agreed upon verbally. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but the core principle is the written amendment. Option (d) is incorrect as senior officials’ say-so is irrelevant if not formalized in writing as part of the contract.

A Conditional Premium Receipt (CPR) provides temporary coverage from the date of application, contingent upon the applicant being found insurable on standard terms at the time of application. This means that if the applicant is later deemed uninsurable or requires a higher premium due to their health status at the time of application, the coverage provided by the CPR may not be valid or may be adjusted. The question tests the understanding of the conditions under which a CPR is effective, highlighting that insurability at the time of application is the key determinant.

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 but potentially more valuable over the long term if the insurer performs well.

The Illustration Document for Investment-linked Policies (ILP) 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. The document must detail the projected investment performance, including potential returns and the impact of charges, and clearly outline the various fees and charges associated with the policy, such as management fees, administration fees, and mortality charges. It also needs to explain the nature of the underlying investment funds, including their investment objectives and risk profiles. Furthermore, it must provide information on the surrender value, death benefit, and any guarantees or non-guarantees. The primary purpose is to ensure transparency and to help consumers understand the long-term implications of investing in an ILP, thereby promoting fair dealing and consumer protection in line with regulatory requirements.

A reversionary bonus in a with-profits policy represents a financial interest that accrues to the policyholder over time. While the policyholder currently possesses this interest, the full benefit and control over it are deferred until a future event, typically the maturity of the policy or the death of the insured. This aligns with the definition of a reversionary interest, where ownership rights are held but the enjoyment of those rights is postponed. Options B, C, and D describe different concepts: a rider is an amendment to a policy, settlement options are choices for payout, and subrogation is a legal principle related to indemnity, none of which accurately describe a reversionary bonus.

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. The question presents a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the regulatory requirements. Therefore, the correct course of action for such an individual is to cease all such activities immediately and apply for the appropriate license from the IA.

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, impacting calculations related to premiums, sum assured, and maturity payouts. Therefore, verifying age at maturity is a standard practice to ensure the correct benefits are disbursed according to the policy terms.

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 demonstrating honesty, integrity, competence, and financial soundness. The scenario describes an intermediary who has been found guilty of fraud, which directly impacts their integrity and honesty, thus failing the “fit and proper” test. Therefore, the IA would likely take disciplinary action, which could include suspension or revocation of their license, to protect policyholders and maintain market integrity, as stipulated by the relevant ordinances and guidelines.

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, 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 requirements for Version 1, making the inclusion of 9% a necessary component. Options B, C, and D are incorrect because they either omit the 9% rate or include rates not specified for Version 1.

This question assesses the understanding of the core principle behind the Financial Needs Analysis initiative, which is to ensure that financial products are suitable for a client’s specific circumstances and objectives. The initiative emphasizes a proactive approach to understanding a client’s financial situation, risk tolerance, and future needs, rather than simply reacting to a client’s stated product preference. Option B is incorrect because while understanding a client’s existing investments is part of the analysis, it’s not the sole or primary driver. Option C is incorrect as the focus is on the client’s needs, not solely on the product’s features or the salesperson’s commission. Option D is incorrect because while regulatory compliance is crucial, the initiative’s primary goal is client-centricity and suitability, which goes beyond mere adherence to minimum disclosure requirements.

The question tests the understanding of settlement options in life insurance, specifically the ‘fixed period option’. This option involves the insurer paying the policy proceeds in equal installments over a predetermined duration. This is essentially equivalent to using the policy proceeds as a single premium to purchase an annuity certain, where payments are guaranteed for a specific number of years, irrespective of the beneficiary’s lifespan. The other options represent different methods of receiving the proceeds: a lump sum is a single payment, an interest option involves leaving the principal with the insurer and receiving only interest, and a fixed amount option pays a set amount until the proceeds are exhausted, which might be for a variable period.

This question assesses the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements for individuals. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, such as the Insurance (Registration of Brokers and Agents) Regulations, mandate that any person who solicits or procures insurance business must be licensed by the Insurance Authority (IA). This includes individuals acting on behalf of a licensed insurance agency or brokerage. The scenario describes an individual engaging in such activities without holding a personal license, which is a contravention of the regulatory requirements. Therefore, the individual is acting unlawfully and is subject to penalties.

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 administrative efficiency. Option D is incorrect because while identifying potential conflicts of interest is important, it’s a secondary consideration to understanding the client’s financial standing and the policy’s appropriateness for their needs.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Option (a) correctly states that if the insured dies during the grace period before the premium is paid, the outstanding premium will be deducted from the death benefit. This is a crucial aspect of how grace periods function, ensuring the insurer is not liable for the full sum assured without receiving the due premium. Option (b) is incorrect because while the initial premium might have different terms, the grace period generally applies to subsequent premiums. Option (c) is incorrect as payment within the grace period is considered timely for the purpose of keeping the policy in force, but it doesn’t retroactively make the premium payment ‘on time’ in the sense of avoiding any potential deductions if death occurs. Option (d) is incorrect because while the policy remains in force, it is not ‘free insurance’ as the unpaid premium will be deducted from any benefit, as described in the correct option.

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 to be presented. Option C is incorrect as the primary purpose of customization is to tailor the illustration to the specific product and customer, not to simplify it to the point of omitting crucial details. Option D is incorrect because the inclusion of additional information is permitted, but it must be relevant and not misleading, not simply any information the company wishes to add.

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

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 lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding 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 unlawfully and is subject to penalties. The other options are incorrect because while an insurance company is regulated, the focus of the question is on the intermediary’s actions. Furthermore, while professional bodies may have their own codes of conduct, the primary legal requirement for transacting insurance business stems from the IA’s licensing regime.

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 scenario describes an individual acting as a broker without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for licensing and regulating insurance intermediaries. Operating as an insurance broker without a valid license issued by the IA is a contravention of the Ordinance. Therefore, the individual is acting unlawfully and is subject to enforcement actions by the IA. Options B, C, and D describe actions or entities that are not directly relevant to the immediate legal status of an unlicensed broker operating in Hong Kong. While the IA oversees the industry, and professional bodies may have codes of conduct, the primary legal issue is the unlicensed activity itself.

A Conditional Premium Receipt (CPR) provides temporary coverage from the date of application, contingent upon the applicant being found insurable on standard terms at the time of application. This means that if the applicant is later deemed uninsurable or requires a higher premium due to their health status at the time of application, the coverage provided by the CPR may be voided or adjusted. The question tests the understanding that the CPR’s validity is tied to the insurability assessment made by the insurer based on the information provided during the application process.

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 regulatory requirements, leading to potential penalties and legal consequences. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and professional development, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates mandatory provident fund schemes, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries.

The scenario describes an applicant whose medical information indicates a risk that deviates from the standard. The insurer’s response of imposing an additional charge on the premium is a common underwriting practice to account for this increased risk. This is known as ‘loading the premium’ and is a way to make a sub-standard risk insurable by adjusting the cost to reflect the higher probability of claims. Refusing to insure is a more extreme measure, and while a debt on the policy or specific exclusions are also underwriting actions, loading the premium is the most direct and standard method for managing a slightly elevated risk profile without outright declinature or highly specific limitations.

The core principle differentiating life insurance and annuities lies in their fundamental risk assumptions. Life insurance is designed to provide a payout upon the occurrence of an event (death), with premiums generally increasing with age due to the higher probability of death. Conversely, annuities are structured to provide income during the annuitant’s lifetime, with payments increasing with age at commencement because the insurer is betting on the annuitant living longer, thus requiring more payments. This is directly related to the underwriting philosophy of each product, where life insurance mitigates the risk of premature death, and annuities mitigate the risk of outliving one’s savings.