Paper 3 Long Term Insurance Quiz 30

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any, which is typically distributed as policy dividends. This potential for dividends means that PAR policies generally carry higher premium rates compared to non-participating (NON-PAR) policies, which do not offer such a share in profits. While dividends are not guaranteed, the expectation of receiving them influences the pricing structure, making PAR policies more expensive upfront. Term insurance, by its nature, is usually a non-participating product as it covers a specific period without accumulating cash value or sharing in profits.

A collateral assignment is a temporary arrangement where a life insurance policy is pledged as security for a loan. The assignee’s rights are limited to the loan amount plus interest. Upon full repayment of the loan, the assignor regains all 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 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 Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, which is a specific type of retirement scheme, but not the general licensing of insurance intermediaries.

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 crucial for understanding the product’s benefits and risks, such as the impact of inflation. Option (c) is incorrect as the primary purpose of customization is to clarify and tailor the illustration to the specific product and customer, not to simplify it to the point of obscuring key financial implications. Option (d) is incorrect because while consistency in presentation is important, the ability to add relevant information that aids customer understanding is a permitted form of customization, as long as it adheres to the non-misleading principle.

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 ‘Initiative on Financial Needs Analysis’ mandates that an FNA form must accompany applications for new life insurance policies falling under Class C or Class A of the Insurance Ordinance, with specific exclusions. These exclusions include term insurance, refundable policies for specific health coverages, yearly renewable non-cash value policies for critical illness/medical cover, and group policies. Therefore, a policy that is a yearly renewable critical illness policy without cash value is exempt from the FNA requirement.

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, and risks. It is designed to facilitate informed decision-making by outlining projected investment returns, charges, and the potential impact of various scenarios on the policy’s value. The document serves as a vital tool for ensuring transparency and consumer protection in the sale of ILPs, aligning with the regulatory framework governing financial advisory services in Hong Kong.

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 is to seek clarification and gather all necessary details to make an informed decision. This involves requesting further medical reports, conducting additional investigations, or even arranging for a medical examination if deemed necessary. The goal is to obtain a complete and accurate picture of the applicant’s health status to determine the appropriate premium and terms, or to decline coverage if the risk is uninsurable. Simply accepting the application without further inquiry or proceeding with a standard policy without addressing the discrepancies would be a failure to adhere to sound underwriting principles and regulatory expectations.

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 these policies compared to non-participating (NON-PAR) policies, which do not offer such a share. The higher premium for PAR policies accounts for the possibility of future dividend payments, even though these are not guaranteed. Term insurance, by its nature, is generally not structured to participate in profits and therefore is usually offered on a non-participating basis.

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.

This question tests the understanding of disclosure requirements for insurance policies sold to Mainland China residents. The Insurance Authority (IA) mandates specific disclosure documents. The ‘Important Facts Statement for Mainland Policyholder’ is a crucial document that must be provided to these policyholders, outlining key policy terms and conditions in a clear and understandable manner. This ensures policyholders are fully informed before making a purchase, aligning with the principles of fair dealing and consumer protection mandated by insurance regulations in Hong Kong.

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 Insurance Authority (IA) is responsible for licensing and regulating insurance intermediaries. The question tests the knowledge that an individual must be licensed by the IA to solicit or transact insurance business. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in the industry, it is not the licensing authority for individual intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF-related business, not general insurance intermediation. Option D is incorrect because while professional bodies may offer certifications, they do not grant the legal authority to conduct insurance business; that power rests solely with the IA.

The question tests the understanding of the role of the insurance intermediary or group representative in the initial stages of policy issuance. According to the provided text, the process of an insured person completing an enrolment card and receiving a certificate is typically overseen by the insurance intermediary or group representative. This highlights their responsibility in ensuring the accurate and complete documentation for new policyholders, which is crucial for the proper establishment of the insurance contract and subsequent servicing.

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 a hand, which is a specific type of limb loss. According to common provisions in accident riders, the loss of a single limb usually triggers a benefit that is a stated proportion of the accidental death benefit, rather than the full accidental death benefit. The full benefit is typically reserved for more severe outcomes like the loss of two limbs or total blindness. Therefore, receiving a benefit equal to a fraction of the accidental death benefit is the most accurate description of the payout for losing one hand.

When an insurance office identifies potential twisting, the Code of Conduct mandates a structured approach to address the situation and protect the policyholder. A crucial initial step, as outlined in the regulations, is to acknowledge the client’s complaint and provide a timeline for the investigation and resolution. Specifically, the selling office must inform the client within 30 days of receiving the complaint about the findings and any proposed remedies. This communication is vital for maintaining transparency and managing client expectations during a potentially stressful situation. The other options describe actions taken after the initial acknowledgment or are related to different stages of the process, such as reporting the agent or suspending business, which occur after the initial assessment and agreement on the course of action.

The core principle differentiating life insurance and annuities lies in their fundamental risk assumptions. Life insurance is designed to provide a payout upon the occurrence of an event (death), meaning the insurer benefits from a shorter lifespan of the insured. Conversely, annuities are structured to provide income for the annuitant’s lifetime, meaning the insurer benefits from the annuitant living longer. This directly impacts underwriting: life insurance premiums increase with age because the probability of death rises, while annuity payments increase with age at commencement because the period over which payments are made is shorter, requiring larger individual payments to meet the lifetime obligation. Similarly, men typically receive higher annuity payments than women of the same age because, statistically, women tend to live longer, meaning the annuity payout period for women is expected to be longer.

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 is a trigger, the specified life expectancy of 12 months or less is a crucial condition that is omitted. Option C is incorrect as the need for a specified medical procedure is a trigger, but the scenario describes a diagnosis of a condition, not a procedure. Option D is incorrect because while a waiting period might apply, the core trigger for the benefit is the diagnosis of a covered condition, not the completion of a waiting period for a different type of benefit.

This question tests the understanding of premium waiver provisions in the context of Long-Term Care (LTC) benefits. The syllabus indicates that it is common for premiums to be waived for both the rider and the basic insurance plan during the period LTC benefits are being paid. Therefore, if an insured is receiving LTC benefits, their premiums for the policy and any associated riders, such as a critical illness rider, would typically be waived, not increased or continued.

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 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 an industry association, it does not issue licenses. 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 Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and the purpose of the insurance policy. This includes assessing the client’s ability to pay premiums, the suitability of the product based on their needs and risk tolerance, and identifying any potential money laundering or terrorist financing risks. While understanding the client’s investment experience is relevant for some financial products, it is not the primary focus for all long-term insurance business, especially those that are primarily savings or protection-oriented. The core objective is to ensure the policy is appropriate and that the business is conducted ethically and legally.

The Insurance Authority (IA) mandates the use of the Investor Protection Information Statement – Mainland Prospect (IFS-MP) for all new applications of long-term insurance policies for individual customers who are holders of a Hong Kong Resident Identity Card (PRC). This requirement applies across all distribution channels and policy classes (A-F) as defined under ‘long term business’ in the Insurance Ordinance. Crucially, these customers are not permitted to opt out of this procedure. The regulation also extends to changes in policy ownership or assignments where the new policyholder or assignee is a PRC Resident Identity Card holder, necessitating a new IFS-MP for them.

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 Hong Kong Federation of Insurers is an industry association and not a licensing authority. Option D is incorrect because while the IA oversees the industry, the act of soliciting insurance without a license is a direct violation of the Ordinance, not merely a matter of IA oversight without consequence.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The primary goal of purchasing 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 intended function of the insurance, which directly relates to the financial needs it is meant to address for the beneficiaries. Option (a) focuses on the client’s wealth, which is relevant for affordability but not the core purpose. 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 client’s financial planning goals. Option (d) addresses affordability, which is a practical consideration, but secondary to understanding the ‘why’ behind the insurance purchase.

The question tests the understanding of the intermediary’s role in the application process, specifically concerning the disclosure of material facts. According to the syllabus, the application form is the primary source for underwriting, and intermediaries must ensure all material facts are disclosed. This includes providing full explanations for ‘Yes’ answers to health or other inquiries, along with relevant dates. Option (a) accurately reflects this responsibility by emphasizing the need for comprehensive disclosure and accurate recording of information. Option (b) is incorrect because while the intermediary assists, the applicant is ultimately responsible for the accuracy of their statements. Option (c) is incorrect as the intermediary’s role is to facilitate accurate disclosure, not to interpret the applicant’s intentions. Option (d) is incorrect because the intermediary’s duty extends beyond simply ensuring the form is signed; it involves ensuring the information provided is complete and truthful.

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 verifiable 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 of premiums, minus allowable expenses, which aligns with regulatory requirements. Option B is incorrect because while a refund is generally due, it’s not always the full amount if expenses have been incurred. 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 specific.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and risk tolerance. When a client proposes to pay a single premium that is significantly disproportionate to their stated income or financial resources, it raises a red flag. This discrepancy suggests a potential mismatch between the client’s declared profile and the proposed transaction, which could indicate money laundering activities or a misunderstanding of the product’s suitability. Therefore, the insurer must investigate this anomaly further to ensure compliance with anti-money laundering regulations and to confirm the suitability of the product for the client. This involves gathering additional information about the source of funds and the client’s overall financial standing.

This question tests the understanding of how inflation impacts long-term insurance policies and the role of specific riders in mitigating this effect. The Cost of Living Adjustment (COLA) rider is designed to periodically increase disability income benefits based on an independent index, such as the Consumer Price Index. This directly addresses the erosion of purchasing power caused by inflation, ensuring that the real value of the benefits remains consistent over time. Other riders, while valuable, do not directly address the ongoing impact of inflation on the benefit payout itself. For instance, a Waiver of Premium rider addresses premium payments during disability, and specified event riders cover specific life occurrences. Temporary cover provides additional protection during a purchase option period. Therefore, COLA is the most appropriate rider for addressing the long-term effects of inflation on disability income.

Renewable term insurance allows the policyholder to extend the coverage period without needing to provide new evidence of insurability. However, the premium for the renewed term is recalculated based on the insured’s attained age at the time of renewal. This means the premium will increase due to the older age. The question tests the understanding of how premiums are adjusted in renewable term policies, specifically linking it to the insured’s age at renewal, which is a core feature of this product type as per the IIQE syllabus.

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 acts as an intermediary without the necessary authorization, which is a breach of the regulatory requirements. Understanding the IA’s role and the necessity of a license for any person conducting insurance intermediary business is crucial for compliance. The other options represent incorrect interpretations of regulatory responsibilities or licensing procedures.

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 licensing ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, which is a specific type of retirement scheme, but not the broader insurance intermediary licensing.