Paper 3 Long Term Insurance Quiz 34

When replacing a life insurance policy, the insurance intermediary must ensure that the client is fully informed about potential changes in policy provisions. A key implication of a new policy is the potential for a new contestability period to begin. This period, typically two years from the policy’s issue date, allows the insurer to investigate and potentially deny claims if material misrepresentations were made during the application process. If the existing policy had a shorter or no remaining contestability period, initiating a new one with the replacement policy could disadvantage the policyholder, as a claim arising early in the new policy’s life might be denied, whereas it would have been covered under the original policy. Therefore, the intermediary must explain this and obtain the expiry dates of these periods for both policies.

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 intermediary’s duty to ensure the applicant provides complete and accurate information, including necessary details and dates, for underwriting. 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 not limited to merely witnessing the signature; it involves ensuring the completeness and accuracy of the information provided. Option (d) is incorrect because the intermediary’s primary duty is to the accuracy of the information for underwriting, not to expedite the process at the expense of completeness.

The scenario describes a policyholder who has a Long-Term Care (LTC) rider attached to their life insurance policy. The question asks about the premium payment during the period when LTC benefits are being received. According to the provided syllabus, it is common for premiums to be waived for both the rider benefit and the basic insurance plan during the period that LTC benefits are being paid to the policyowner-insured. Therefore, the policyholder would not be required to pay premiums for either the LTC rider or the main life insurance policy while receiving LTC benefits.

Policy revival, also known as reinstatement, refers to the process of restoring a lapsed insurance policy to its full force. This is typically subject to certain conditions stipulated in the policy contract. These conditions often include a time limit within which the revival can be requested, the requirement to pay all outstanding back premiums along with accrued interest, and potentially other requirements such as providing updated health information or undergoing a medical examination to ensure the life insured is still insurable. The purpose is to allow policyholders to regain coverage without needing to purchase a new policy, which might be more expensive or have different terms due to age or health changes.

The question tests the understanding of ‘Reversionary Bonus’ in the context of with-profits policies. A reversionary bonus is a bonus that is added to the sum assured and becomes a guaranteed part of the policy value. It is ‘reversionary’ because its full enjoyment is deferred until a future event, typically the maturity or death claim of the policy. While it increases the policy’s value, it is not immediately available for withdrawal like a cash value might be. Option B is incorrect because while it enhances the policy, it’s not a settlement option itself. Option C is incorrect as it’s not a rider, which modifies the policy terms. Option D is incorrect because it’s not a surrender value, which is the cash amount paid upon policy termination.

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 a right to reclaim 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.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Failing to obtain the necessary license constitutes a breach of the regulatory requirements, leading to potential penalties and invalidation of any business conducted. The other options represent incorrect interpretations of the regulatory landscape. The Hong Kong Monetary Authority (HKMA) regulates banks, the Securities and Futures Commission (SFC) regulates the securities and futures markets, and the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, none of which are directly responsible for licensing insurance intermediaries.

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 carrying out regulated activities, such as acting as an insurance broker or agent, must be licensed by the IA. Failure to do so constitutes a breach of the law, and the IA has the power to take enforcement actions, including imposing penalties. Therefore, the IA would be the appropriate body to investigate and take action against such an unlicensed activity.

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 diminishing real value of benefits due to inflation.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Failing to obtain the necessary license constitutes a breach of the Ordinance and can lead to penalties. Therefore, any individual acting as an insurance intermediary without a valid license is operating illegally.

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 the impact of attained age on the premium rate, which is a core concept in understanding this type of insurance as per the IIQE syllabus.

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 intermediary’s duty to ensure the applicant provides complete and accurate information, including necessary details and dates, for underwriting purposes. 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 not limited to merely witnessing the signature; it involves active guidance in disclosure. Option (d) is incorrect because the intermediary’s responsibility extends beyond just ensuring the form is filled; it’s about the quality and completeness of the information provided for risk assessment.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the concept of ‘loss of use’ versus physical severance. The Insurance Companies Ordinance (Cap. 41) and related regulations govern insurance contracts in Hong Kong, including the interpretation of policy terms. While physical severance is a common definition, policies often extend coverage to situations where a limb is rendered functionally useless due to an accident, even if it remains attached. Option A correctly captures this broader interpretation, aligning with common policy provisions that define ‘loss of a limb’ to include the loss of its effective use. Options B, C, and D present narrower or incorrect interpretations of dismemberment coverage, such as solely focusing on physical severance, requiring loss of the entire limb’s function, or linking it to specific amputation levels not universally applied.

The Standard Illustration for Participating Policies, as mandated by regulatory guidelines, requires insurers to provide a summary of major benefits for participating policies, excluding universal life insurance. A key provision is that the illustration must clearly state that projected non-guaranteed benefits, such as dividends or bonuses, are based on the company’s current dividend scales and assumed investment returns. These projections are not guaranteed, and actual amounts may vary, potentially being higher or lower. The illustration must also detail how changes in investment returns can impact total surrender and death benefits, and that non-guaranteed benefits could even be zero under certain circumstances. Therefore, emphasizing the non-guaranteed nature of projected dividends and the potential for variation based on investment performance is a crucial disclosure requirement.

An annuity is a contract where an insurer agrees to make a series of periodic payments to a designated individual (the payee) for a specified period or for the lifetime of another person (the annuitant). These payments are made in exchange for an initial lump sum or a series of payments (annuity considerations). The question describes a scenario where an insurer promises to pay a sum of money to a person over a period of time in exchange for an upfront payment, which perfectly aligns with the definition of an annuity. Option B describes a life insurance policy with an accelerated death benefit, which is a payout before death under specific health conditions, not a series of payments over time. Option C refers to accident benefits, which are additional payouts for accidental death or dismemberment, not a structured payment plan. Option D describes an absolute assignment, which is the irrevocable transfer of policy ownership rights, unrelated to annuity payments.

Policy revival, or reinstatement, refers to the process of bringing a lapsed policy back into full force. This is a contractual right provided under the policy terms, but it is subject to specific conditions. These conditions typically include a time limit within which the revival must be requested, the payment of all overdue premiums along with interest, and potentially the submission of updated health information or a medical examination to ensure the insured is still insurable. The purpose is to restore the policy to its original status, as if it had never lapsed, provided these requirements are met.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s lifespan. This distinguishes it from annuities that are contingent on survival. The scenario describes a contract that guarantees payments for a specific duration, aligning with the definition of an Annuity Certain. Options B, C, and D describe different types of insurance or financial products that do not fit this fixed-term, life-independent payment structure.

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 Office of the Privacy Commissioner for Personal Data focuses on data privacy, which is a separate regulatory concern from the licensing of insurance intermediaries.

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, an intermediary’s crucial initial inquiry should focus on what the policyholder aims to achieve with the insurance coverage, such as income replacement, debt repayment, or legacy planning. Option (a) is too narrow, focusing only on the insured’s financial capacity without understanding their needs. 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 concrete information about the policyholder’s objectives.

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 at age 60, the premiums paid would cover the period from policy inception until age 60. If the policyholder survives past age 65, no further premiums are due, regardless of how long they live. Therefore, the total premiums paid would be for the period from policy inception until age 65.

A Family Income Insurance policy is a form of decreasing term insurance. Its primary function is to provide a regular monthly income to the surviving spouse or dependants for a specified period after the insured’s death. This income stream is designed to replace a portion of the deceased’s earnings, thereby maintaining the family’s financial stability during a critical period. The benefit is paid for the remainder of a predetermined term, offering a consistent monthly payout rather than a lump sum.

This question tests the understanding of the principle of indemnity in insurance contracts, specifically its application to life insurance. The principle of indemnity aims to restore the insured to the financial position they were in before the loss occurred. In life insurance, the loss is the death of the insured, which is difficult, if not impossible, to quantify financially in the same way as property damage or liability. Therefore, life insurance policies are typically ‘benefit policies’ where a predetermined sum is paid upon the occurrence of the insured event (death), rather than being subject to the principle of indemnity. The statement that life insurance contracts are not normally subject to indemnity, and instead utilize benefit policies, accurately reflects this distinction.

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 at age 60, the premiums paid would cover the period from policy inception until age 60. If the policyholder survives past age 65, no further premiums are due, regardless of how long they live. Therefore, the total premiums paid would be for the period from policy inception until age 65.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the 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 advance premium payments.

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 the statutory body responsible for licensing and regulating insurance intermediaries. The question highlights a common scenario where an individual is acting as a representative of an insurance agency. To legally conduct insurance business, such an individual must be licensed by the IA. The other options represent incorrect or irrelevant regulatory bodies or licensing statuses. The Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, the Securities and Futures Commission (SFC) regulates securities and futures activities, and being an employee of a licensed insurer does not automatically grant a license to act as an intermediary for that insurer’s products without individual licensing.

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 scenario where an individual is soliciting insurance business without the requisite authorization. This directly contravenes the provisions of the Ordinance, which mandate that any person carrying on or holding out as carrying on the business of insurance intermediary must be licensed by the IA. The penalty for such an offense is stipulated within the Ordinance, underscoring the importance of compliance. The other options are incorrect because while other regulatory bodies exist in Hong Kong (e.g., SFC for securities), they do not govern insurance intermediaries. Furthermore, while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business stems from the IA’s licensing regime.

The Customer Protection Declaration Form, as outlined by the Hong Kong Federation of Insurers (HKFI), serves as a crucial document to ensure transparency and informed consent. It requires the insurer to clearly disclose specific information to the policyholder, particularly concerning the nature of the product, its risks, and the benefits. This includes detailing any potential conflicts of interest, the cooling-off period, and the cooling-off procedures. The primary objective is to empower the customer by providing them with all necessary details to make a well-informed decision, thereby upholding the principles of fair dealing and consumer protection mandated by regulatory bodies overseeing the insurance industry in Hong Kong.

The question tests the understanding of settlement options in life insurance, specifically the ‘fixed period option’. This option involves the insurer paying the policy proceeds in equal installments over a predetermined duration. This is essentially equivalent to using the policy proceeds as a single premium to purchase an annuity certain, where payments are guaranteed for a specific term, irrespective of the beneficiary’s lifespan. The other options represent different methods of payout: a lump sum is a single payment, an interest option involves leaving the principal with the insurer and receiving only interest, and a fixed amount option pays a set amount until the proceeds are exhausted, which might not be for a fixed period. A life income option, conversely, pays for the beneficiary’s lifetime.

Family Income Insurance (家庭收入壽險) is a type of decreasing term insurance. It is designed to provide a regular monthly income to the surviving spouse or dependants for a specified period after the insured’s death. This income stream is intended to replace the deceased’s earnings, thereby maintaining the family’s standard of living. Unlike a standard term policy that pays a lump sum, this product focuses on providing a continuous stream of income, making it a valuable tool for income replacement. The benefit amount typically decreases over the payout period, reflecting the diminishing needs of the dependants as they grow older or become self-sufficient.

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 additional benefits) 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 alterations must be in writing and agreed upon by the policyowner. This ensures clarity, prevents disputes, and maintains the integrity of the long-term agreement. Option (b) is incorrect because it focuses on the incontestability clause, not the entire contract. Option (c) is incorrect as it describes the incontestability clause’s limitations regarding fraud, which is a separate provision. Option (d) is incorrect because it describes the conditions for contract modification, which is a component of the entire contract provision but not its primary definition.