Paper 3 Long Term Insurance Quiz 25

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments. Premiums paid are used to purchase units in a fund, and the policy’s value fluctuates based on the unit price. This means the policyholder bears the investment risk. The question tests the understanding of how the value of a unit-linked policy is determined and the associated risk, differentiating it from traditional insurance products where the insurer bears more of the investment risk.

This question tests the understanding of the core 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, the most crucial question an intermediary should ask is about the policyholder’s objectives and what they want the insurance to achieve for their loved ones. Option (a) focuses on financial capacity, which is important but secondary to understanding the need. 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 policyholder’s financial planning goals. Option (d) addresses affordability, which is a key consideration, but understanding the ‘why’ behind the insurance (the need) should precede the ‘how much’ (the premium). This aligns with the IIQE syllabus’s emphasis on client-centric advice and needs analysis.

The scenario describes a situation where a policyholder failed to disclose symptoms that were later diagnosed as nasopharyngeal carcinoma. The insurer attempted to repudiate the claim based on material non-disclosure. However, the Complaints Panel ruled in favour of the claimant. One of the key reasons for this ruling was the application of the incontestability provision. This provision, typically effective after a certain period (in this case, more than two years after the policy came into force), prevents an insurer from voiding a policy due to misrepresentation or non-disclosure, unless fraud can be proven. Since no evidence of fraud was presented, and the policy had been in force for over two years, the incontestability provision shielded the policy from being rescinded on the grounds of non-disclosure. The question tests the understanding of how the incontestability provision operates as a defence against claims of breach of utmost good faith, particularly when fraud is not involved.

When a policy is issued with the notation “age not admitted,” it signifies that formal verification of the policyholder’s age was not provided at the policy’s inception. While some insurers might waive this requirement upon policy maturity, it is crucial to request proof of age. This is because any misstatement of age, even if not initially verified, can significantly alter the policy benefits payable, potentially leading to underpayment or overpayment of claims. This aligns with the principle of accurate risk assessment and fair benefit calculation in insurance contracts.

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.

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 focus of the question is on the intermediary’s actions. The Hong Kong Federation of Insurers is an industry association, not a regulatory body for licensing. The Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries directly, although some products may overlap.

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 has been successfully treated and is in remission, the underwriter’s primary concern is the likelihood of recurrence or future complications. The guideline mandates that underwriters must gather sufficient information to make an informed decision. This includes obtaining detailed medical reports, specialist opinions, and potentially requiring further investigations. The goal is to determine if the past condition significantly increases the risk of future claims beyond what is standard for the general population or for individuals with similar, but resolved, health issues. Therefore, the underwriter must assess the probability of the condition impacting the applicant’s lifespan or leading to future claims, considering the specific nature of the condition, the treatment received, and the duration of remission. This assessment directly influences the premium charged and the terms offered, ensuring that the policy reflects the actual risk presented by the applicant.

The scenario describes an applicant whose medical assessment indicates a higher than average risk. The insurer’s options for handling such a situation are outlined in the syllabus. Loading the premium is a standard underwriting practice to account for increased risk, making the policy insurable at a higher cost. Refusing to insure (declinature) is a more severe measure, while offering a limited plan or specific exclusions are also possible but less common than premium adjustments for general substandard risks. A ‘debt on the policy’ is a specific mechanism for decreasing mortality risk, not a general response to any substandard risk.

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 Ordinance. The correct answer highlights the requirement for a license from the IA, as stipulated by the relevant legislation. The other options are incorrect because they refer to different regulatory bodies or processes that are not directly applicable to the licensing of insurance intermediaries for conducting insurance business in Hong Kong.

The Insurance Authority (IA) mandates the use of the Investor Protection Information Statement – Mainland Policyholder (IFS-MP) for all new applications of long-term insurance policies for individual customers who are holders of a PRC Resident Identity Card, across all distribution channels and policy classes. This requirement is non-negotiable, meaning customers cannot opt out. The regulation also specifies that if a policy ownership changes or is assigned to a new policyholder who is a PRC Resident Identity Card holder, the IFS-MP must be completed by the new policyholder. This ensures that all relevant policyholders, regardless of how they acquire the policy, are adequately informed about the product’s nature and associated risks.

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 provides incomplete or potentially misleading information regarding their medical history, the underwriter’s primary responsibility, as guided by the principle of utmost good faith and the need for accurate risk assessment, is to seek clarification and verify the information. This ensures that the policy is priced appropriately based on the true risk profile and that the insurer is not exposed to unforeseen liabilities. Simply accepting the application without further inquiry or declining it outright without attempting to obtain complete information would be contrary to sound underwriting practices and regulatory expectations.

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 agents and brokers. To conduct insurance business in Hong Kong, an entity or individual must be licensed by the IA. The question highlights a scenario where an individual is providing advice on insurance products without holding the necessary license, which is a contravention of the regulatory requirements. 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 promotion, 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 business. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the insurance intermediary sector.

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 Hong Kong Federation of Insurers (HKFI) is a self-regulatory organization for insurers, and while it plays a role in industry standards, it is not the licensing authority for intermediaries. The Hong Kong Confederation of Insurance Brokers (HKCIB) is a professional body for insurance brokers, but again, the ultimate licensing authority is the IA. The Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, which is distinct from general insurance intermediary licensing.

The scenario describes a situation where a policyholder failed to disclose symptoms that were later diagnosed as a serious illness. The insurer attempted to repudiate the claim based on material non-disclosure. However, the policy had been in force for more than two years, triggering the incontestability provision. Under Hong Kong insurance law, an incontestability clause generally prevents an insurer from voiding a policy due to misrepresentation or non-disclosure after a specified period (typically two years), unless the non-disclosure was fraudulent. In this case, the Complaints Panel found no evidence of fraud and concluded that the incontestability provision should apply, preventing the insurer from denying the claim on the grounds of non-disclosure. The panel also noted that the policyholder might not have been aware of the severity of the symptoms, and the duty of disclosure typically ends upon contract conclusion unless otherwise agreed.

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 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.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. 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 ensures its continuity by covering the premium payments. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which one is suited by education, training, or experience, or a specific physical loss like blindness in both eyes or loss of use of limbs. The scenario provided illustrates a common point of contention: the insurer’s interpretation of ‘total disability’ versus the insured’s expectation, particularly when the policy uses a restrictive definition like ‘unable to engage in any gainful occupation’. In the case presented, the insurer’s stance, supported by the Complaints Panel, was that the insured could still engage in other gainful occupations, even if their original profession was no longer feasible. Therefore, the rider’s benefit is to waive future premiums while the policy remains active, not to provide a lump sum payment or to retroactively refund premiums unless specified as a ‘time franchise’ feature.

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 determines the projection. Option D is incorrect because while the insurer’s investment performance is crucial for non-guaranteed benefits, the illustration focuses on the projected outcomes of these benefits rather than the underlying performance metrics themselves.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. 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 ensures its continuity by waiving future premium payments while the insured is disabled. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific physical loss like blindness in both eyes or loss of use of limbs. The scenario provided illustrates a common point of contention: the insurer’s interpretation of ‘total disability’ versus the insured’s expectation. In this case, the policy’s definition of ‘total and permanent disability’ required the insured to be unable to engage in *any* gainful occupation. Since the insured could still potentially work in other capacities, even if not as a fireman, the claim was denied. This highlights the importance of understanding the specific wording of the disability definition within the rider, as a more restrictive definition will limit the scope of coverage.

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 incorrect regulatory bodies or incorrect licensing requirements. The Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries. The Securities and Futures Commission (SFC) regulates the securities and futures markets. While there are ongoing discussions and potential future alignment of regulatory frameworks, currently, the IA is the sole authority for insurance intermediary licensing.

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, which, depending on the nature and extent of the referral, can be considered a regulated activity. The key is that any person who solicits or accepts insurance business, or holds themselves out as being able to do so, must be licensed. Therefore, even a referral role, if it involves more than a passive introduction and touches upon the solicitation or arrangement of insurance, would necessitate a license. The other options are incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and consumer education, it does not issue licenses. Similarly, the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, not general insurance intermediaries. The Hong Kong Confederation of Insurance Brokers (HKCIB) is a professional body for insurance brokers, but it is the IA that grants the statutory license.

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 spouses generally have an insurable interest, and other close blood relatives might in some jurisdictions, Hong Kong law, as stipulated in this section, limits the statutory extension of insurable interest based on family relationships to parents/guardians of minors. Therefore, a policy taken out by an aunt on her nephew’s life, without any other qualifying relationship or interest, would be considered void from inception due to the lack of a legally recognized insurable interest at the commencement of the contract.

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 supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the licensing or regulatory landscape. Option B is incorrect because while professional bodies may have their own codes of conduct, they do not replace the statutory licensing requirement. Option C is incorrect as the IA’s approval is a prerequisite, not a subsequent formality. Option D is incorrect because while the Insurance Companies Ordinance covers various aspects of insurance business, the core requirement for an intermediary is the license itself.

The scenario highlights the principle of utmost good faith in insurance, specifically the applicant’s duty to disclose material facts. Even though the applicant underwent a medical examination, the insurer rescinded the policy because the examination did not fully reveal pre-existing conditions that were material to the risk. The Complaints Panel’s decision reinforces that submitting to a medical examination does not absolve the applicant of their duty to disclose all relevant medical history, unless the examination itself is designed to uncover all such information. Therefore, the insurer was justified in rescinding the policy due to the breach of the duty of disclosure, as the undisclosed conditions were material facts that influenced the insurer’s decision to accept the risk and the premium charged. The Personal Data (Privacy) Ordinance is relevant to the process of gathering information, but it does not negate the fundamental duty of 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, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual might engage in insurance-related activities without the necessary authorization, which is a contravention of the law. The correct answer emphasizes the legal obligation to be licensed by the IA to conduct such business, aligning with the principles of consumer protection and market integrity mandated by the Ordinance. The other options present incorrect or irrelevant regulatory bodies or processes, designed to test a candidate’s precise knowledge of Hong Kong’s insurance regulatory structure.

The question tests the understanding of the “law of large numbers” in the context of life insurance premium calculation. The law of large numbers states that as the number of trials (in this case, insured lives) increases, the observed frequency of an event (death) will approach its theoretical probability. This allows insurers to make reasonably accurate predictions about mortality rates for a large group, even though individual outcomes are uncertain. Option (a) correctly identifies this principle. Option (b) describes the concept of subrogation, which is irrelevant to premium calculation and applies to indemnity insurance, not life insurance. Option (c) refers to the principle of indemnity, which is also not a core factor in life insurance premium calculation, as life insurance is not typically a contract of indemnity. Option (d) describes the concept of “utmost good faith,” which is a general principle of insurance contracts but not the specific statistical principle used for premium calculation.

This question assesses the understanding of the ‘Initiative on Financial Needs Analysis’ as outlined in Appendix F of the IIQE syllabus. The core principle of this initiative is to ensure that financial advice provided to clients is tailored to their specific financial situation, needs, and objectives. This involves a thorough assessment of their income, expenses, assets, liabilities, insurance coverage, and future financial goals. Option A correctly identifies this comprehensive approach. Option B is incorrect because while affordability is a factor, it’s not the sole determinant; the analysis must also consider the client’s actual needs and risk tolerance. Option C is incorrect as it focuses only on existing financial products, neglecting future needs and potential changes. Option D is too narrow, focusing only on immediate financial obligations and ignoring long-term planning and risk management.

The question tests the understanding of premium waiver provisions in life insurance policies, specifically in the context of Long-Term Care (LTC) benefits. 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. This waiver is a standard feature designed to alleviate the financial burden on the policyholder when they are actively receiving benefits.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any, typically through policy dividends. This potential for profit sharing means that the insurer needs to collect a higher premium to cover the possibility of paying out these dividends, as well as to maintain a buffer for the insurer’s operations. Non-participating (NON-PAR) policies, conversely, do not offer this profit-sharing feature, allowing the insurer to set lower premiums as they are not factoring in the potential distribution of surplus to policyholders. Therefore, PAR policies are generally priced higher than equivalent NON-PAR policies.

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. Failure to obtain the necessary license can result in penalties. The other options represent entities or concepts that are not directly responsible for issuing individual licenses to insurance intermediaries.

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.