Paper 3 Long Term Insurance Quiz 26

The question tests the understanding of premium waiver provisions in long-term care (LTC) insurance. According to the 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 key feature designed to alleviate the financial burden on the policyholder when they are receiving benefits. Therefore, the statement that premiums are typically waived for both the rider and the basic plan during the payout period of LTC benefits is accurate.

This question tests 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, it relates to the ongoing due diligence required for existing clients. Financial institutions are obligated to keep client information up-to-date and assess the risk associated with their ongoing business relationship. A significant change in the nature of a client’s business, such as a shift from retail sales to international wholesale trading, fundamentally alters the risk profile and necessitates a review of the existing due diligence measures. This review ensures that the controls in place remain appropriate for the new risk level, aligning with the principles of continuous monitoring and risk-based approach embedded in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and related guidelines issued by the Hong Kong Monetary Authority (HKMA) or other relevant regulators. Failing to update due diligence in response to such a material change could lead to a breach of regulatory requirements.

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.

This question tests 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). Licensed corporations are obligated to ensure that their representatives are properly licensed for the regulated activities they conduct. This includes verifying the representative’s license status and ensuring it aligns with the specific products being distributed. Failure to do so can lead to regulatory action. Option B is incorrect because while client suitability is crucial, the primary regulatory breach here is the unlicensed activity. Option C is incorrect as the SFC’s approval for specific products is not a prerequisite for a representative’s license to distribute them; rather, the representative’s license must cover the activity of distributing such products. Option D is incorrect because while record-keeping is a general compliance requirement, the core issue is the lack of proper licensing for the activity itself.

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. 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 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 Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the fundamental licensing obligation.

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

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. 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 process or regulatory bodies. For instance, the Hong Kong Monetary Authority (HKMA) regulates banks, and the Securities and Futures Commission (SFC) regulates the securities and futures markets. While there can be overlap in financial services, the specific activity of selling insurance requires a license from the IA.

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. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Option B is incorrect because the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets. Option D is incorrect because while professional bodies may set ethical standards, the ultimate licensing and regulatory authority rests with the IA.

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. 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 are incorrect because while professional bodies may offer certifications, they do not confer the legal right to conduct insurance business. The Hong Kong Federation of Insurers is an industry association, not a licensing authority. The Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediation.

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 then every fifth year thereafter, up to maturity or the policy’s end. It also mandates the use of specific assumed rates of return (0%, 3%, 6%, and 9% for Version 1, or 0%, 3%, and 6% for Version 2) and requires the inclusion of policy-level charges but excludes fund management charges. The statement regarding the relationship between the rate of return, policy termination, and the consequences of automatic early termination is also a mandatory disclosure. Option A correctly captures these essential elements. Option B is incorrect because it omits the requirement for illustrating values at specific intervals beyond the first five years and incorrectly includes fund management charges. Option C is incorrect as it suggests illustrating only at maturity and fails to mention the specific assumed rates of return and the required cautionary statements. Option D is incorrect because it limits the illustration to only one assumed rate of return and does not specify the required intervals for showing surrender values and death benefits.

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 a license before commencing such activities constitutes a breach of the law and can lead to penalties. Therefore, a person intending to solicit insurance business must first secure the appropriate license from the IA.

The question tests the understanding of the conditions under which a Critical Illness (CI) benefit can be paid. According to the syllabus, a CI benefit is payable when the insured is diagnosed with a specified disease, a terminal illness with a life expectancy of 12 months or less, or requires a specified medical procedure. Option A correctly identifies the diagnosis of a specified disease as a trigger for the CI benefit. Option B is incorrect because while a terminal illness with a life expectancy of 12 months or less is a trigger, the scenario does not mention this specific condition. Option C is incorrect as the syllabus does not state that a policy must have been in force for a minimum of one year for a CI benefit to be payable; this is typically a condition for Long-Term Care benefits. Option D is incorrect because the syllabus specifies that CI benefits are paid as a lump sum, not in monthly installments.

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. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Option B is incorrect because while the Hong Kong Federation of Insurers is an industry association, it does not issue licenses. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the insurance 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, 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 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 Hong Kong Monetary Authority (HKMA) regulates the banking sector, not insurance intermediaries. Option D is incorrect because while professional indemnity insurance is a requirement for certain intermediaries, it does not exempt them from the fundamental licensing obligation.

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, as well as being of good character and financial integrity. The scenario describes a situation where an intermediary’s financial standing has deteriorated significantly due to poor investment decisions, potentially impacting their ability to meet obligations and maintain client trust. This directly relates to the financial integrity aspect of the “fit and proper” test, which is a fundamental ongoing requirement under the relevant legislation and guidelines issued by the IA. Failure to maintain these standards can lead to disciplinary actions, including the suspension or revocation of a license. Therefore, the intermediary must proactively address this situation to ensure continued compliance.

When recommending a regular premium policy, a CIB Member must ensure that the client understands the financial commitment. This includes clearly stating the ratio of regular premiums to the client’s disposable income, calculated according to the relevant Guidance Note. Additionally, the total financial commitment, encompassing premiums for any riders, must be disclosed. A crucial aspect is to address situations where the premium payment term extends beyond the client’s target retirement age. In such cases, the client’s intended source of funds for these later payments must be identified and communicated. Before finalizing the arrangement, the client must provide a written declaration confirming their comfort with the premium-to-disposable income ratio, their consent to the overall financial commitment, and their ability to meet premium payments beyond their target retirement age, if applicable. This comprehensive disclosure and confirmation process is mandated by regulatory guidelines to ensure informed decision-making and client protection.

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. A professional body might offer certifications, but it does not grant the legal authority to conduct insurance business. The Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. The Companies Registry deals with company registration, not the licensing of individuals to conduct specific financial services.

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.

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 a U.S. style policy might offer a period of ‘free insurance’ if the premium is not paid by the end of the grace period and the insured survives, the deduction of the premium from the death benefit is the standard practice if death occurs within the grace period.

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 strictest sense if the due date has passed. Option (d) is incorrect because the scenario described in (i) of the original text, where the premium is deducted from the death benefit, is a key feature of the grace period and not an example of ‘free insurance’. Free insurance typically refers to a situation where the policy remains in force for a period after the premium is due but unpaid, without deduction from the benefit.

A reversionary bonus is a type of bonus declared by a participating life insurance policy that is not paid out immediately but is added to the policy’s death benefit or cash value. The policyholder has a financial interest in this bonus from the time it is declared, but the full enjoyment and privileges of ownership, such as receiving the cash value of the bonus, 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 present ownership rights are held, but the full benefit is postponed. Options B, C, and D describe different concepts: a rider modifies policy terms, settlement options are choices for payout, and subrogation is a legal principle related to indemnity, which doesn’t apply to life insurance.

This question tests the understanding of disclosure requirements for insurance policies sold to Mainland China residents. The Insurance Authority (IA) mandates specific disclosures to ensure policyholders are fully informed. The ‘Important Facts Statement for Mainland Policyholder’ is a crucial document that must be provided in Chinese, as stipulated by the IA, to comply with regulatory requirements and ensure clarity for the target audience. Providing it in English would not meet the regulatory obligation for this specific group of policyholders.

This question tests the understanding of how insurers handle applicants who do not meet standard underwriting requirements. Loading the premium is a common method to adjust for increased risk, allowing the insurer to offer coverage at a higher cost. Refusal to insure (declinature) is a last resort. A ‘debt on the policy’ or lien is a specific mechanism for decreasing mortality risks, not a general approach for all substandard risks. Specific exclusions are rare and often counterproductive to the purpose of insurance. Therefore, loading the premium is the most standard and broadly applicable underwriting reaction to a 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, including the licensing and supervision of insurance agents and brokers. The question highlights the importance of holding a valid license issued by the IA to conduct insurance intermediary activities legally. Without this authorization, any solicitation or transaction of insurance business is prohibited. The other options describe activities or entities that are either not directly related to the primary licensing requirement for intermediaries or are incorrect interpretations of the regulatory scope.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential for profit sharing means that the premiums charged for PAR policies are typically higher than those for non-participating (NON-PAR) policies, which do not offer such profit participation. 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 Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, the final decision-making authority rests with the board. The guideline also emphasizes the need for a corporate policy on surplus allocation and dividend declarations, approved by the board and available to the IA.

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 benefit. The question tests the understanding of the fundamental difference in premium pricing between these two types of policies, directly relating to the concept of policy dividends and their impact on premium rates as outlined in the syllabus.

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 a sibling on the life of their adult sibling, without any other qualifying relationship (like being a spouse or a creditor with a debt), would technically be void from inception due to the absence of the required insurable interest at the commencement of the contract.

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 premiums are allocated and how the policy value is determined in a unit-linked product, distinguishing it from traditional insurance where the insurer bears the investment risk.

This question tests the understanding of the “cooling-off” period as stipulated by the Hong Kong regulatory framework for insurance intermediaries. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, specifically the Insurance (Intermediaries) Regulation, outline the rights and obligations of policyholders. A key consumer protection measure is the right to cancel a policy within a specified period after receiving the policy documents, without penalty, and to be refunded any premiums paid. This period is commonly referred to as the cooling-off period. The duration of this period is typically 14 days, commencing from the date the policyholder receives the policy documents. During this time, the policyholder can reassess their needs and the suitability of the insurance product. If they choose to cancel, they are generally entitled to a refund of the premiums paid, less any administrative charges that might be explicitly permitted by the regulations for processing the cancellation. The question focuses on the policyholder’s right to a refund of premiums paid, which is a direct consequence of exercising the cooling-off option.