Paper 3 Long Term Insurance Quiz 29

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.

The question tests the understanding of ‘Reversionary Bonus’ which is a type of financial interest where the full enjoyment of ownership is deferred to a future time or event. In the context of a with-profits policy, these bonuses are typically declared periodically but are only fully realized or payable upon the maturity of the policy or upon the death of the insured. Therefore, it represents a future entitlement rather than an immediate right or a guaranteed payment. Option B is incorrect because a ‘Settlement Option’ refers to how policy proceeds are paid out, not the nature of the bonus itself. Option C is incorrect as ‘Subrogation’ is a principle related to indemnity in non-life insurance and does not apply to life insurance. Option D is incorrect because ‘Surrender Value’ is the cash amount received when a policy is terminated prematurely, which is distinct from the nature of a reversionary bonus.

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.

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, emphasizing the importance of adhering to licensing provisions to ensure consumer protection and market integrity. The other options represent incorrect regulatory bodies or incorrect interpretations of the licensing process.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) governs the licensing and operations of insurance companies in Hong Kong. Specifically, it focuses on the requirement for an insurer to obtain authorization from the Insurance Authority (IA) before commencing any insurance business. The scenario describes a company that has not yet secured this authorization, making its operations illegal under the Ordinance. Option B is incorrect because while a business plan is crucial, it doesn’t grant the legal right to operate without IA authorization. Option C is incorrect as the Companies Ordinance (Cap. 622) deals with company registration, not the specific licensing for insurance activities. Option D is incorrect because while customer complaints are important, the primary legal barrier to operation is the lack of IA authorization.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the policy’s cash value. These deductions are specifically mentioned in the syllabus as adjustments for items like paid-up additions, outstanding policy loans and their accrued interest, and any advance premium payments. Therefore, the Net Cash Value is not simply the stated cash value but a reduced amount reflecting these financial adjustments.

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. The client must then 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 payments beyond their target retirement age, if applicable. This ensures transparency and client understanding of long-term financial obligations.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. In such an assignment, the assignee’s rights are limited to the amount of the loan plus any accrued interest. The assignor retains the right to reclaim full ownership of the policy once the loan is fully repaid. Crucially, during the period of a notified collateral assignment, the assignor is typically restricted from exercising certain policy rights, such as taking out a policy loan or surrendering the policy, as these actions could jeopardize the security provided to the assignee.

Policy revival, or reinstatement, refers to the process of restoring a lapsed insurance policy to its full coverage. This is typically permitted under the policy’s terms and conditions, but it is subject to specific requirements. These requirements often include a time limit within which the revival must be requested, the payment of all overdue premiums along with applicable interest, and potentially other conditions such as providing evidence of insurability, especially if the policy has been lapsed for an extended period. The core concept is to bring the policy back into active status, but it’s not an automatic right and involves fulfilling certain obligations.

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 determining the cost of providing a death benefit. Expenses, such as administrative costs, commissions, and marketing, are also factored in as they represent a direct cost to the insurer. Interest is crucial because premiums collected are invested, and the anticipated investment returns help offset the cost of benefits. Morbidity, on the other hand, relates to the incidence of sickness or disability, which is primarily relevant for health insurance or disability riders, not the core calculation of life insurance premiums for the death benefit itself.

The question tests the understanding of the Duty of Disclosure, a fundamental principle in insurance contracts. This duty requires all material facts relevant to the risk being insured to be disclosed by both parties before the contract is concluded. Failing to disclose a material fact, even if not explicitly asked, can render the contract voidable by the insurer. Option (a) correctly identifies this obligation. Option (b) is incorrect because while the insurer also has a duty to disclose, the primary focus of the question is on the policyholder’s obligation. Option (c) is incorrect as the duty of disclosure applies to all material facts, not just those specifically requested. Option (d) is incorrect because the duty of disclosure is a pre-contractual obligation, not a post-contractual one.

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 advised to maintain records of complaints or disputes where clients are refused refunds outside the cooling-off period. These records are to be provided to the Hong Kong Federation of Insurers (HKFI) upon request. Therefore, the intermediary’s primary responsibility in this specific situation, as per the advice given, is to ensure these records are maintained and available.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between full and partial benefits. The scenario describes a policyholder who suffers the loss of one hand and the sight in one eye due to an accident. According to standard provisions for dismemberment riders, the loss of one limb and the loss of sight in one eye are usually compensated with a specified percentage of the accidental death benefit, often less than the full benefit paid for the loss of two limbs or total blindness. Option A correctly reflects this by stating a benefit equal to a stated proportion of the accidental death benefit. Option B is incorrect because it implies the full accidental death benefit, which is typically reserved for more severe outcomes like the loss of two limbs or total blindness. Option C is incorrect as it suggests no benefit would be paid, which contradicts the common practice of providing partial benefits for such injuries. Option D is incorrect because it implies a benefit only for the loss of a limb, ignoring the additional loss of sight.

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 benefit to become active, although a waiting period for the diagnosis itself might apply. Option D is incorrect because the benefit is paid to the policyowner-insured, not directly to a medical facility.

The scenario describes a situation where an insurance agent recommends a new policy that, while offering a higher sum insured, also has a significantly higher annualised premium compared to the existing policy. According to the Code of Conduct for Persons Licensed by or Registered with the Insurance Authority, specifically concerning the prevention of twisting and the requirements for the Customer Protection Declaration (CPD) Form, an insurance intermediary must provide written reasons and justifications if the new policy attracts a higher annualised premium for the same sum insured. Failing to do so constitutes a breach of the regulations designed to protect policyholders from disadvantageous replacements.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. The assignee’s rights are limited to the loan amount plus interest. Upon repayment of the loan, the assignor regains full rights to the policy. Crucially, during a collateral assignment, the policy owner (assignor) cannot exercise certain policy rights, such as taking a policy loan or surrendering the policy, as these actions would diminish the security provided to the assignee.

This question assesses the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the responsibilities of licensed insurance agents and brokers under the Insurance Ordinance (Cap. 41) and its subsidiary legislation. The scenario highlights a common ethical dilemma where an intermediary might be tempted to prioritize personal gain over client interests. The correct answer, emphasizing the duty to act in the client’s best interest and avoid conflicts of interest, aligns with the core principles of conduct expected of licensed professionals. Option B is incorrect because while record-keeping is important, it doesn’t directly address the primary ethical obligation in this situation. Option C is incorrect as the focus is on the intermediary’s conduct, not the insurer’s product development. Option D is incorrect because while compliance with the Insurance Ordinance is paramount, the specific action described in the question directly relates to the duty of care and avoiding conflicts of interest, which are fundamental ethical requirements.

The CIB (Confederation of Insurance Brokers) mandates that its members conduct a thorough needs analysis for clients seeking long-term insurance. This analysis must encompass understanding the client’s existing financial commitments, income sources, and overall financial priorities. Crucially, it requires obtaining details about any current long-term insurance policies the client holds, regardless of their status (in force, paid-up, suspended, or under premium holiday). This information is vital for assessing the client’s capacity to commit to new or additional policies and for providing appropriate advice, potentially including options within existing policies before recommending new ones. Therefore, a CIB member must inquire about all such existing policies to fulfill their advisory obligations.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the assumed rates of return. According to the regulations, illustrations for non-linked policies should present projected surrender values and death benefits based on a set of assumed rates of return. Version 1 templates require four rates (0%, 3%, 6%, and 9%), while Version 2 templates require three rates (0%, 3%, and 6%). The key is that for rates other than 0%, these are maximum rates, and insurers have the discretion to illustrate lower rates. The question specifically asks about the rates that must be included, and the correct answer reflects the requirement for Version 1 templates, which includes 0%, 3%, 6%, and 9%. The other options present incorrect combinations or omit necessary rates.

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. 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, particularly when the policy uses a restrictive definition like ‘unable to engage in any gainful occupation’. In the given case, the insurer’s stance, supported by the Complaints Panel, was that the insured could still pursue other gainful employment, thus not meeting the policy’s specific definition of total disability for the waiver benefit.

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 companies, on the other hand, are owned by their participating policyholders and do not have shareholders. A company that is a limited liability company with shareholders is characteristic of a proprietary structure.

A joint-life policy is designed to cover the lives of two or more individuals. The critical aspect is when the policy pays out. A ‘first-to-die’ policy pays out upon the death of the first insured person, while a ‘last-to-die’ policy pays out only when the last insured person dies. The question describes a policy that pays on the death of the first individual, which aligns with the definition of a ‘first-to-die’ joint-life policy. The other options describe different types of insurance or policy features that do not fit the scenario.

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 highlights a situation where an individual is acting as an intermediary without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing of insurance agents and brokers. Engaging in insurance intermediary activities without a valid license is a breach of the Ordinance and carries penalties. Therefore, the correct course of action for the IA is to investigate and potentially take enforcement action against the unlicensed individual.

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 PAR policies generally carry higher premium rates compared to non-participating (NON-PAR) policies, which do not offer such profit participation. The question tests the understanding of the fundamental difference in premium structure between these two types of policies, directly relating to the concept of ‘PAR or NON-PAR’ as a factor influencing life premium rating.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically 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 solicit or transact insurance business. The question presents a scenario where an individual is providing advice on insurance products without holding the necessary license. This action constitutes a breach of the regulatory requirements, as only licensed individuals are permitted to engage in such activities. The other options describe activities that are either not directly related to the licensing of intermediaries or are permissible under different circumstances or by different entities.

The question tests the understanding of the ‘Duty of Disclosure’ in insurance contracts, a fundamental principle under Hong Kong insurance law. This duty requires all parties to a proposed insurance contract to reveal all material facts to each other before the contract is concluded, regardless of whether these facts are specifically asked for. Material facts are those that would influence a prudent insurer’s decision to accept the risk or the terms on which it would be accepted. Failing to disclose such facts can lead to the insurer voiding the policy. Option (a) accurately reflects this obligation. Option (b) is incorrect because while honesty is required, the duty extends beyond mere honesty to proactive disclosure of all material facts. Option (c) is incorrect as the duty applies to both parties, not just the applicant. Option (d) is incorrect because the duty is to disclose material facts, not just information that is requested.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the policy’s cash value. These deductions are typically for outstanding policy loans, accrued interest on those loans, and any advance premium payments. Paid-up additions, which are small amounts of additional insurance purchased with dividends, are generally added to the cash value and do not reduce the Net Cash Value. Therefore, the Net Cash Value is the cash value less policy loans and interest, and less any advance premium payments.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s survival. This distinguishes it from other annuity types that are contingent on life expectancy. The question tests the understanding of this core feature of an Annuity Certain, differentiating it from annuities that might have variable payout durations based on life events.

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 anticipated investment returns help offset the cost of claims and expenses. Expenses, such as acquisition costs, administrative overhead, and commissions, are also factored into the premium to cover the operational costs of providing the insurance. 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.

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 *forms* the projection basis in the same way as benefits. Option D is incorrect because while the insurer’s investment performance is crucial for non-guaranteed benefits, it’s the *projected* non-guaranteed benefits themselves that are shown, not the performance metrics directly. Therefore, the illustration is built upon the projected values of guaranteed and non-guaranteed benefits and the resulting cash surrender value.