Paper 3 Long Term Insurance Quiz 32

When replacing an existing life insurance policy with a new one, the insurance intermediary must meticulously document and explain various implications to the client. One crucial aspect relates to the contestability period and suicide clause. If the new policy has a new contestability period, any claim arising from suicide within this new period might be denied, even if the original policy would have covered it. The intermediary is obligated to obtain and record the expiry dates of these periods for both the existing and new policies. Failure to do so, or to adequately explain this potential gap in coverage, would be a significant oversight in fulfilling their duty of care and adherence to regulatory requirements concerning policy replacement.

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 or purpose of the insurance for the client. Option (a) is too narrow, focusing only on financial capacity without understanding the need. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a valid consideration but secondary to understanding what the client wants the insurance to achieve. Option (d) addresses affordability, which is important, but only after the purpose has been established.

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 critical illness/medical policies, and group policies. Therefore, a policy that is a yearly renewable critical illness policy without cash value is exempt from the FNA requirement.

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 accrued 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, which is a core aspect of policyholder services and contract law within the insurance industry.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance intermediaries. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding a license. This action constitutes a breach of the regulatory requirements, as only licensed individuals or entities are permitted to engage in such activities. The other options are incorrect because while professional bodies may have their own codes of conduct, the primary legal requirement for transacting insurance business stems from the IA’s licensing regime. Furthermore, the Companies Ordinance (Cap. 622) deals with company registration and governance, not the licensing of insurance intermediaries, and the Securities and Futures Ordinance (Cap. 571) regulates the securities and futures markets, which is distinct from insurance distribution.

A deferred annuity is a contract where the commencement of benefit payments is postponed to a future date, which is specified by the contract terms. This future date could be a particular age of the annuitant or a predetermined point in time. Unlike immediate annuities where payments begin shortly after purchase, deferred annuities allow for a period of accumulation before payouts start. The question tests the understanding of the core characteristic of a deferred annuity, which is the delayed commencement of benefits.

This question assesses the understanding of the ‘Initiative on Financial Needs Analysis’ as outlined in Appendix F of the IIQE syllabus. The core principle of this initiative is to ensure that financial advice provided to clients is tailored to their specific financial situation, needs, and objectives. This involves a thorough assessment of their income, expenses, assets, liabilities, and future financial goals. Option A correctly captures this essence by emphasizing a comprehensive evaluation of the client’s financial landscape to determine suitable product recommendations. Option B is incorrect because while affordability is a factor, it’s not the sole determinant and the analysis goes beyond just affordability. Option C is incorrect as the initiative focuses on the client’s needs, not solely on the product’s features or the advisor’s expertise. Option D is incorrect because while regulatory compliance is important, the initiative’s primary goal is client-centric advice, not just meeting minimum disclosure requirements.

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 critical illness/medical policies without cash value, and group policies. The question tests the understanding of these specific exclusions, requiring the candidate to identify which policy type would *not* require an accompanying FNA form according to the regulations.

This question assesses 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 licensing and regulating insurance intermediaries. An individual must be licensed by the IA to conduct regulated activities, which include advising on, selling, or arranging insurance products. Failing to obtain a license before engaging in these activities constitutes a breach of the law, leading to potential penalties. The other options are incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, and the Securities and Futures Commission (SFC) regulates securities and futures activities, the IA is the sole authority for insurance intermediaries. The Companies Registry is responsible for company registration, not licensing of individuals for insurance business.

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 and owned by shareholders is by definition a proprietary or stock company, regardless of whether ‘Mutual’ is in its name, as some mutuals can de-mutualize.

A joint-life policy is designed to insure 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 individual, while a ‘last-to-die’ policy pays out only after the death of the final insured individual. The question describes a scenario where the policy pays out upon the death of the second of two insured individuals, which aligns with the definition of a last-to-die joint-life policy. The other options describe different types of insurance or policy features. A key person policy insures a business against the loss of a vital employee, a level term policy provides a fixed death benefit for a specified period, and a mortgage redemption policy is specifically designed to cover outstanding mortgage balances and typically pays on the first death.

This scenario describes an applicant who has disclosed a history of a serious medical condition that requires further investigation by the insurer. According to underwriting principles, when an applicant’s health history suggests a higher likelihood of mortality or claims than a standard risk, they are classified as a sub-standard risk. This classification allows the insurer to offer coverage but with specific adjustments, such as higher premiums or policy limitations, to account for the increased risk. Preferred risks are those with better-than-average health, declined risks are those deemed uninsurable by the company, and standard risks are those with no abnormal health features.

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 acts as a defence against claims of breach of utmost good faith, specifically when fraud is not involved.

The scenario describes an applicant whose medical assessment indicates a higher-than-average risk for mortality. The insurer’s options for handling such a situation are outlined in the provided text. Loading the premium is a standard underwriting practice to account for increased risk, making the policy insurable at a higher cost. Refusing to insure (declinature) is a more severe measure, while offering a limited plan or specific exclusions are also possibilities but less common than premium adjustments for general substandard risks. A ‘debt on the policy’ is a specific mechanism for decreasing mortality risk, not a general method for all substandard risks. Therefore, increasing the premium is the most direct and common response to an applicant who is below the standard for normal rates due to medical reasons.

The question tests the understanding of the ‘adequate’ and ‘equitable’ principles in life insurance premium calculation. An adequate premium ensures the insurer has sufficient funds to meet its obligations, including paying benefits and covering operational costs. An equitable premium means that each policyholder pays an amount proportionate to the risk they represent and the benefits they are entitled to. Option (a) correctly identifies both these fundamental principles. Option (b) is incorrect because while expenses are a factor, they are part of the loading on the net premium, not a primary principle of premium calculation itself. Option (c) is incorrect because ‘interest’ is a component used to calculate the net premium, not a principle governing the overall premium adequacy or fairness. Option (d) is incorrect because ‘mortality’ is a key factor in determining the net premium, but ‘equitable’ is the principle that ensures fairness in the distribution of costs based on mortality risk, and ‘adequate’ ensures the overall sufficiency of funds.

The question tests the understanding of the purpose and content of a benefit illustration document, specifically focusing on the information prospective policyholders should consider regarding future costs and the insurer’s practices. Section 5/23 (viii) explicitly states that customers should be aware that the cost of living in the future is likely to be higher due to inflation, which is a crucial factor in long-term financial planning. While dividend history (ix) and the commitment to the premium payment term (x) are also important considerations, the impact of inflation on future expenses is a direct warning about the purchasing power of future benefits. The consequence of early termination (xi) is also a critical point, but the question asks what the customer should note about the values shown in the illustration, and inflation directly affects the real value of those illustrated future benefits.

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 it. Therefore, the Net Cash Value is the cash value minus loans and interest, and minus advance premiums.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The core function of life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, the most crucial question an intermediary should ask to understand the client’s needs is what they want the insurance to achieve for their loved ones. Option (a) focuses on the client’s financial capacity, which is important but secondary to understanding the objective. 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 needs and could be perceived as dismissive. Option (d) is about affordability, which is a constraint, not the primary objective.

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 issued by the PRC. This requirement applies across all distribution channels and policy classes (A through 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. The question tests the understanding of the scope and applicability of the IFS-MP requirement for PRC residents.

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 that is contingent on the policy remaining in force. Option B describes a ‘Rider’, which is an amendment to a policy that alters benefits. Option C, ‘Settlement Options’, refers to how policy proceeds are paid out. Option D, ‘Subrogation’, is a legal principle related to indemnity and does not apply to life insurance.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Failure to obtain the required license can lead to penalties and legal repercussions. The other options represent incorrect or irrelevant regulatory bodies or requirements.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments chosen by the policyholder. This means that the policy’s value will fluctuate in line with the market value of these investments. Therefore, if the investments perform poorly, the policy value will decrease, and if they perform well, the policy value will increase. This direct linkage to investment performance is the defining characteristic of unit-linked products, distinguishing them from traditional insurance policies where the insurer bears the investment risk.

This question assesses the understanding of the core principle behind the Financial Needs Analysis initiative, which is to ensure that financial products are suitable for a client’s specific circumstances and objectives. The initiative emphasizes a client-centric approach, moving beyond a one-size-fits-all model. Option (a) correctly identifies the primary goal of aligning product features with individual client requirements and risk tolerance. Option (b) is incorrect because while affordability is a consideration, it’s not the sole or primary driver of the analysis; suitability is paramount. Option (c) is incorrect as the focus is on the client’s needs, not solely on the product’s profitability for the distributor. Option (d) is incorrect because while regulatory compliance is essential, the initiative’s purpose is to enhance client protection and product suitability, which then supports compliance.

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 age verification. 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, thereby impacting the insurer’s financial obligations and the policyholder’s entitlements as per the Insurance Ordinance.

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 explains 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, potentially leading to an undesirable situation where premiums are waived even when the insured is no longer disabled. To address this, some policies automatically switch to a monthly premium mode for waiver purposes, or explicitly disallow changes to premium frequency during disability. Therefore, the most accurate statement is that the policy might automatically adjust the premium payment frequency to a more frequent basis to align with the waiver period, preventing an extended, unintended waiver.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it ensures its continuity by waiving future premium payments while the insured is disabled. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific loss of limbs or sight. The scenario presented in the study material highlights a restrictive definition where the insured’s ability to engage in *any* gainful occupation, even if different from their previous one, led to the claim being denied. Therefore, the rider’s primary function is to maintain the policy’s active status without premium payments during the defined period of disability.

This question tests the understanding of the “Cooling-off Initiative” in Hong Kong’s insurance sector, a consumer protection measure. The initiative allows policyholders a specific period after receiving policy documents to reconsider their purchase. If exercised within this timeframe, the policy is cancelled, and premiums paid are returned, minus any administrative costs. The period is typically 14 days, and it applies to most new life insurance policies sold in Hong Kong, not just those from members of the Hong Kong Federation of Insurers. Crucially, this right is for the policyholder to cancel, not for the insurer to cancel the policy.

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 a specific benefit rather than to compensate for a quantifiable loss. Therefore, life insurance contracts are generally considered benefit policies, not indemnity policies, making statement (iii) and (iv) accurate.

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 instance of losing a limb. According to standard provisions, the loss of one limb typically results in a payment that is a stated proportion of the accidental death benefit, rather than the full accidental death benefit itself. The full benefit is usually reserved for more severe outcomes like the loss of two limbs or total blindness. Therefore, receiving a benefit equal to a specified percentage of the accidental death benefit is the most accurate description of the payout for losing one limb.

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, including acquisition costs, administrative overhead, and commissions, are also factored in as they represent the insurer’s operational costs. 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 and critical illness riders, not the core calculation of life insurance premiums for the death benefit itself.