Paper 3 Long Term Insurance Quiz 28

A proprietary or stock company is owned by its shareholders, who have limited liability. This means their financial responsibility for the company’s debts or losses is capped at the amount they have invested in the company’s shares. Mutual insurance companies, on the other hand, are owned by their participating policyholders and do not have shareholders. Therefore, the concept of shareholders having limited liability is a defining characteristic of proprietary companies, not mutual ones.

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 constitutes a breach of the law and can result in penalties. Therefore, an individual soliciting insurance business without a valid license is acting unlawfully.

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 discovered later, can significantly alter the policy benefits, potentially leading to underpayment or overpayment of claims or maturity proceeds. This aligns with the principle of accurate risk assessment and fair benefit calculation in insurance contracts.

A joint-life policy is designed to cover two or more individuals. The critical aspect is when the payout occurs. A policy that pays out on the ‘first death’ is known as a ‘first-to-die’ policy, while one that pays out on the ‘last death’ is a ‘survivor’ or ‘last-to-die’ policy. The question specifies that the policy pays on the ‘last death’, which directly aligns with the definition of a survivor policy. The other options describe different types of insurance or policy features that do not specifically address the payout condition based on the last death.

When recommending a regular premium policy, a Certified Insurance Broker (CIB) member must ensure that the client understands and confirms their financial commitment. This includes not only the regular premiums but also any premiums for riders. Furthermore, if the premium payment term extends beyond the client’s stated retirement age, the CIB member must ascertain and document the client’s intended source of funds for these later payments. This comprehensive approach ensures the client is fully aware of the long-term financial implications and has a viable plan to meet them, aligning with the principles of responsible financial advice and client protection mandated by regulations governing insurance intermediaries.

The principle of utmost good faith in insurance mandates that applicants disclose all material facts that could influence an insurer’s underwriting decision. In this scenario, the applicant’s history of obstructive sleep apnoea, even if seemingly unrelated to the subsequent critical illness, was deemed material by the insurer’s underwriting manual. The manual indicated that the severity of sleep apnoea and associated conditions could affect underwriting for critical illness and waiver of premium benefits. The applicant’s failure to disclose this condition, which would have prompted the insurer to seek further information or medical examinations, constitutes a breach of this duty. The Complaints Panel’s decision to uphold the insurer’s rejection of claims is based on the materiality of the non-disclosed fact to the underwriting process, not on a direct causal link between the sleep apnoea and the colon cancer. This aligns with the legal requirement for applicants to disclose facts that an insurer would consider relevant in assessing risk and determining policy terms, as per the Insurance Contracts Ordinance.

This question tests the understanding of how premiums are handled in a life insurance policy that has an age-related limitation on premium payments. The scenario describes a policy where premiums cease at a specific age, say 65. If the policyholder dies before reaching this age, premiums are only payable up to the date of death. This means that if death occurs before the age limit, the remaining premiums that would have been paid until age 65 are not collected. Therefore, the total premiums paid would be less than if the policyholder had lived to the age limit and paid premiums until then.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this effect. A Cost of Living Adjustment (COLA) rider is a provision that allows for periodic increases in benefits, such as disability income, to keep pace with inflation. These increases are typically tied to an independent index, like the Composite Consumer Price Index, ensuring that the real value of the benefit is maintained over time. The other options describe different aspects of insurance or riders that do not directly address the erosion of purchasing power due to inflation in the context of ongoing benefit payments.

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 payment is critical for policy commencement, the grace period concept applies to subsequent premium payments. 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; rather, it prevents lapse. Option (d) is incorrect because the scenario described in (i) is a deduction, not free insurance; free insurance, as described in (ii) for U.S. style policies, refers to the policy remaining in force for the full amount until the end of the grace period if the premium is not paid, but the deduction scenario is a specific contractual provision.

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. The question presents a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the regulatory requirements. The explanation highlights that operating without a license is a serious offense, and the IA has the power to impose penalties, including fines and disqualification, to ensure market integrity and consumer protection. The other options are incorrect because while professional conduct and client suitability are crucial aspects of an intermediary’s role, they are secondary to the fundamental requirement of holding a valid license to conduct insurance business.

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 regulating the insurance industry in Hong Kong. Any person or entity conducting insurance intermediary business, whether as an agent or a broker, must be licensed by the IA. Operating without a license is a contravention of the relevant legislation, leading to potential penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) is a self-regulatory organization for insurers, it does not directly license individual intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) 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.

The ‘entire contract’ provision in a life insurance policy is a fundamental clause that defines the complete agreement between the insurer and the policyowner. It clarifies that the policy document itself, along with any attached riders (endorsements or amendments that add or modify coverage) and the accurately recorded copy of the application, collectively form the entirety of the contract. This provision is crucial because it prevents either party from later introducing external documents or verbal agreements as part of the contract. It also stipulates that only authorized senior company officials can alter the contract, and any such changes must be in writing and agreed upon by the policyowner. Option (b) is incorrect because it describes the incontestability provision, not the entire contract provision. Option (c) is incorrect as it focuses on the duration of the contract, which is a separate aspect. Option (d) is incorrect because it refers to the process of making a claim, which is a consequence of the contract, not its definition.

This question tests the understanding of the “cooling-off” period requirement under the Insurance Ordinance (Cap. 41), specifically concerning the cooling-off period for new policies. The Insurance Authority mandates a cooling-off period, typically 14 days, for most new long-term insurance policies. This period allows policyholders to reconsider their purchase and cancel the policy without penalty, receiving a refund of premiums paid, subject to certain deductions for medical examinations or other documented expenses incurred by the insurer. The scenario describes a policyholder who has just received their policy documents and wishes to cancel. The key is to identify the correct timeframe and the implications of cancellation within that period. Option A correctly identifies the 14-day period and the refund mechanism, aligning with regulatory requirements. Option B is incorrect because while a refund is generally due, it’s not always the full premium without any deductions. Option C is incorrect as the cooling-off period is a statutory right, not a discretionary offer by the insurer. Option D is incorrect because the cooling-off period applies to new policies, not existing ones being amended, and the timeframe is typically 14 days, not 7.

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 spouse, parent, child, grandparent, and grandchild generally establish insurable interest in many jurisdictions, Hong Kong law, as stipulated in Section 64A, explicitly extends this to a parent or guardian concerning a minor, regardless of direct blood relation. Therefore, a policy taken out by a grandparent on the life of their grandchild, while potentially having a blood relationship, is only valid if the grandparent also acts as the minor’s legal guardian. Without this guardianship status, the insurable interest is not automatically established by the blood relation alone under Hong Kong law for a minor’s life insurance.

Renewable term insurance allows the policyholder to extend the coverage period without needing to provide new evidence of insurability. However, this renewal is subject to an increased premium, calculated based on the insured’s attained age at the time of renewal. This mechanism is in place because the risk of mortality generally increases with age. The question tests the understanding of how premiums are adjusted in renewable term policies, specifically linking it to the insured’s age.

The Illustration Document for Investment-Linked Policies (ILPs) is a crucial disclosure document mandated by the Securities and Futures Commission (SFC) to provide prospective policyholders with a clear and comprehensive understanding of the policy’s features, benefits, risks, and charges. It serves as a vital tool for informed decision-making. The document must detail the projected investment performance, including potential gains and losses, based on various scenarios. It also outlines all associated fees and charges, such as policy administration fees, investment management fees, and mortality charges, ensuring transparency. Furthermore, it must explain the nature of the underlying investment-linked funds, including their investment objectives and risk profiles. The document is designed to facilitate a fair comparison between different ILP products and to ensure that policyholders are fully aware of the long-term commitments and potential outcomes before purchasing.

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 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 role is to license, not merely to register or approve without a formal licensing process. Option D is incorrect because while some activities might be considered preparatory, actively soliciting business without a license is a direct violation.

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 from the Office of the Commissioner of Insurance (OCI). This constitutes a breach of the law, as only licensed individuals or entities are permitted to solicit or conduct insurance business. The relevant legislation mandates that any person carrying on or holding out as carrying on the business of an insurance agent or broker must be licensed. Therefore, the individual’s actions are illegal and subject to penalties.

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 ‘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 net cash value is used to buy term insurance for the original face amount, for a period the cash value can sustain, which directly describes the extended term insurance option.

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 scenario describes an individual acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. Therefore, the correct action is to report this activity to the IA, as they are the designated authority for enforcing these regulations and ensuring market integrity.

Policy revival, or reinstatement, refers to the process of restoring a lapsed insurance policy to its full coverage. This is typically allowed under specific policy conditions, which often include a time limit for exercising this option, the requirement to pay all overdue premiums along with applicable interest, and potentially other conditions such as providing evidence of insurability. The question tests the understanding of the conditions and limitations associated with bringing a lapsed policy back into force, as outlined in the IIQE syllabus regarding policy revival.

This 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 is a trigger, the specified life expectancy is crucial. Option C is incorrect as the benefit is paid upon diagnosis, not necessarily after a waiting period for the payment to commence. Option D is incorrect because the benefit is paid to the policyowner-insured, not directly to a medical facility.

The question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the premium payment mode is annual. The provided text highlights that if premiums are waived on an annual basis, and the insured recovers after a short period of disability (e.g., 2 months), the waiver would continue for the full annual period, even though the insured is no longer disabled. This can lead to an undesirable situation where premiums are waived for a period the insured is not disabled. Some policies address this by automatically switching to a monthly premium mode for waiver purposes or by disallowing changes to premium frequency during disability. Therefore, the most accurate statement is that an annual premium waiver might continue for the entire annual period even after recovery, unless specific policy provisions alter this.

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 a thorough investigation into the nature of the condition, the treatment received, the duration of remission, and any residual effects. This detailed assessment allows the underwriter to determine if the risk can be accepted at standard rates, with a premium loading, or if it should be declined. Simply accepting the risk at standard rates without further investigation would be imprudent, as it might not adequately account for the potential for future claims related to the past condition. Conversely, an automatic decline without considering the successful treatment and remission would be overly conservative and potentially unfair to the applicant. Therefore, the most appropriate action, aligning with the principles of sound underwriting, is to gather comprehensive information to make an informed decision about the risk, which may involve adjustments to the policy terms or premiums.

The scenario highlights a situation where a policyholder is informed about their cooling-off rights. According to the provided guidelines, intermediaries are required to inform prospective policyholders of their cooling-off rights and the expiry date of this period when they sign their policy application forms. This ensures the policyholder is aware of their right to reconsider the purchase and potentially receive a refund. The other options are incorrect because while policy delivery is important, the primary obligation at the application stage is to inform about cooling-off rights. Furthermore, the specific timeframe for policy delivery or notice issuance (9 days) is a separate requirement that follows the policy issuance, not a prerequisite for informing about cooling-off rights at the application stage. The mention of market value adjustments is relevant to refunds but not to the initial disclosure of cooling-off rights.

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 the policyholder died more than two years after the policy was in force and no evidence of fraud was presented, the incontestability provision shielded the policy from being voided on the grounds of non-disclosure. The other options are incorrect because while utmost good faith is a fundamental principle, the incontestability provision acts as a specific limitation on the insurer’s ability to use breaches of this duty to avoid a claim after a certain period, unless fraud is involved. The duty of disclosure generally ceases upon contract conclusion, and while a policyholder should disclose known material facts, the panel found no evidence of the policyholder knowing or ought to know of a diagnosed disease at the time of application. The absence of a warning clause about post-application health changes is also a factor, but the incontestability provision is the overriding shield against repudiation in this case.

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. Option (a) is incorrect because while some life insurance policies might have features that resemble indemnity, the core principle is benefit-based. Option (b) is incorrect as it oversimplifies the nature of life insurance. Option (d) is also incorrect because it suggests indemnity is prevalent in life insurance, which is contrary to the general understanding.

This question tests the understanding of calculating the probability of winning the jackpot in a 6/49 lottery. The total number of ways to choose 6 numbers from 49 is given by the combination formula C(n, k) = n! / (k! * (n-k)!). In this case, n=49 and k=6. The number of ways to choose 6 numbers from 49 is C(49, 6) = 49! / (6! * (49-6)!) = 49! / (6! * 43!) = (49 * 48 * 47 * 46 * 45 * 44) / (6 * 5 * 4 * 3 * 2 * 1) = 13,983,816. Since there is only one winning combination, the probability of winning the jackpot is 1 divided by the total number of combinations. Therefore, the probability is 1 / 13,983,816.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any attached 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 contract must be formally documented and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, it’s not the sole condition; the change must also be formally incorporated into the contract. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but it’s not sufficient on its own. Option (d) is incorrect as senior officials’ say-so does not override the contractual requirement for formal amendment.