Paper 3 Long Term Insurance Quiz 36

This question tests the understanding of the fundamental structure and ownership of a mutual life insurance company, as distinct from a proprietary company. In a mutual structure, the company is owned by its policyholders, and any profits or surplus are typically distributed among them in the form of dividends or reduced premiums. Shareholders do not own a mutual company, and while policyholders may receive benefits, they don’t necessarily share equally in all profits and dividends; the distribution is usually based on policy type and performance. Limited liability is a characteristic of corporate structures, but it doesn’t define the ownership of a mutual company.

The Standard Illustration for universal life (non-linked) policies is designed to provide a minimum summary of benefits. A key aspect of this illustration is that it refers exclusively to the Basic Plan, excluding any riders or additional benefits. This ensures clarity and focuses the prospective policyholder on the core product features. The scenario explicitly states that the illustration refers to the ‘Basic Plan only (i.e. exclusive of riders and additional benefits)’, making this the correct understanding of its scope.

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 relevant legislation, leading to potential penalties. The other options represent incorrect regulatory bodies or incorrect licensing prerequisites. The Hong Kong Monetary Authority (HKMA) regulates banks and financial institutions, not insurance intermediaries directly. While professional conduct and ethical standards are crucial, they are part of the licensing requirements, not a substitute for the license itself. The Securities and Futures Commission (SFC) regulates the securities and futures markets, not the insurance sector.

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 anticipated retirement age, the CIB member must ascertain and document the client’s intended source of funds for these later payments. This ensures the client is fully aware of the long-term financial implications and has a viable plan to meet them, aligning with the principle of providing clear and comprehensive advice.

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 activities that necessitate a license. Option (a) correctly identifies the Insurance Authority as the issuing body for such licenses. 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 the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, the final decision-making authority rests with the board. The guideline also emphasizes the need for a corporate policy on surplus allocation and dividend declarations, approved by the board and available to the IA.

The level premium system, as described, allows for an unchanging annual premium over the policy’s duration. This is achieved by charging a premium in the early years that is higher than the immediate risk of mortality, and in later years, the premium is lower than the actual risk. The excess premiums collected in the early years, along with the interest earned on them, accumulate to form a reserve fund. This reserve is used to cover the increased mortality risk in the later years of the policy. This mechanism is fundamental to how level premium life insurance policies are priced and managed over the long term, ensuring the insurer can meet its future obligations.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the terms of the contract must be made in writing and formally agreed upon by both parties. Option (a) is incorrect because contracts can be amended, but only through the proper procedure. Options (b) and (c) are partially correct in that policyowner agreement is necessary, but they fail to emphasize the crucial requirement of the change being documented and endorsed by the insurer. Option (d) is incorrect as senior officials’ say-so is not the legal basis for contract amendment; it must be a formal, written endorsement.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The scenario describes an individual acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. Therefore, the correct action is to report this activity to the IA, as they are the designated authority for enforcing these regulations and ensuring market integrity.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over a specified period or for the annuitant’s lifetime, in exchange for an upfront payment or a series of payments. The key elements are the periodic payments, the designated recipient (payee), the life or term upon which payments are based (annuitant), and the initial compensation (annuity considerations). Option A accurately captures these essential components, distinguishing it from other financial products or insurance riders.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensed individuals. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with the guidelines issued by the Insurance Authority (IA), mandate that individuals conducting regulated activities must be licensed. This includes providing advice on or arranging insurance products. The scenario describes an individual acting in such a capacity without the necessary authorization, which constitutes a breach of these regulations. Option B is incorrect because while professional indemnity insurance is a requirement for intermediaries, it does not negate the need for a license. Option C is incorrect as the IA’s approval is a consequence of being licensed, not a substitute for it. Option D is incorrect because while client money handling is regulated, the primary issue here is the unlicensed activity itself.

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 legal consequences. The other options represent incorrect interpretations of the regulatory landscape; for instance, while professional bodies may offer certifications, they do not substitute for the statutory licensing requirement, and the Hong Kong Federation of Insurers is an industry association, not a licensing authority.

The Customer Protection Declaration Form, as outlined by the Hong Kong Federation of Insurers (HKFI), serves as a crucial document for ensuring transparency and informed decision-making by policyholders. It is designed to capture the client’s understanding of the insurance product’s nature, particularly its investment-linked components, and to confirm that the intermediary has adequately explained these aspects. The form’s primary purpose is to document that the policyholder has been made aware of the risks associated with the product, including potential loss of capital, and that they have had the opportunity to ask questions. It also aims to verify that the policyholder understands that the product is not a bank deposit and that its value may fluctuate. Therefore, the most accurate description of its function is to confirm the policyholder’s comprehension of the product’s characteristics and associated risks, thereby safeguarding their interests and fulfilling regulatory requirements for disclosure.

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 this profit-sharing feature. The higher premium for PAR policies accounts for the possibility of future dividend payments to policyholders, making them more expensive upfront. Term insurance, by its nature, is generally not designed for participation in profits as it covers a specific period without building significant cash value or offering profit-sharing mechanisms.

This question tests the understanding of the ‘extended term insurance’ non-forfeiture option. When a policyowner stops paying premiums, the accumulated net cash value can be used to purchase a term insurance policy. The key characteristic of this option is that the death benefit remains the same as the original face amount, but the coverage duration is limited by the amount of cash value available to pay the premiums for that term. The policy is not surrendered for cash, nor is it converted to a paid-up policy with a reduced face amount. The question specifically asks about the outcome when the net cash value is applied to purchase term insurance for the original face amount, which directly aligns with the definition of extended term 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 acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. Failure to obtain the necessary license constitutes a breach of the law and can lead to penalties. The other options represent incorrect regulatory bodies or incorrect licensing requirements. The Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, the Securities and Futures Commission (SFC) regulates the securities and futures markets, and while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business is the IA license.

The scenario highlights the principle of utmost good faith in insurance, specifically the applicant’s duty to disclose material facts. Even though the applicant underwent a medical examination, the insurer rescinded the policy because the examination did not fully reveal pre-existing conditions that were material to the risk. The Complaints Panel’s decision reinforces that submitting to a medical examination does not absolve the applicant of their duty to disclose all relevant medical history, unless the examination itself is designed to uncover all such information. Therefore, the insurer was justified in repudiating the policy due to the breach of disclosure, as the undisclosed tachycardia, ectopic heartbeat, and ischaemic changes were material facts that would have influenced the insurer’s decision to accept the risk or the premium charged.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Option (a) correctly states that if the insured dies during the grace period before the premium is paid, the outstanding premium will be deducted from the death benefit. This is a crucial aspect of how grace periods function, ensuring the insurer is not liable for the full sum assured without receiving the due premium. Option (b) is incorrect because while the initial premium might have different terms, the grace period generally applies to subsequent premiums. Option (c) is incorrect as payment within the grace period is considered timely for the purpose of keeping the policy in force, but it doesn’t retroactively make the premium payment ‘on time’ in the strictest sense if the due date has passed. Option (d) is incorrect because the scenario described in (i) is a deduction, not free insurance; free insurance, as described in (ii) for U.S. style policies, refers to the policy remaining in force for a period after the grace period ends without payment, which is a different concept.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholder expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, and insurers must have a corporate policy on surplus allocation and dividend declarations, the final decision and responsibility rest with the board.

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 intermediaries. An individual must be licensed by the IA to 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 referral activities that lead to the solicitation or transaction of insurance business are considered regulated activities. Therefore, the individual would be in contravention of the relevant provisions of the Insurance Companies Ordinance.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The primary goal of life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, an intermediary should first ascertain what financial needs or objectives the insurance is intended to meet. Option (a) is incorrect because while financial capacity is important, it’s secondary to the purpose. Option (b) is irrelevant to the policyholder’s needs and is an internal matter for the intermediary. Option (c) is a subjective question that doesn’t directly address the policyholder’s specific financial goals for the insurance.

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 value of a human life is not easily quantifiable in monetary terms, and the payout is a pre-agreed sum. Therefore, life insurance is generally considered a benefit policy, not an indemnity policy. While some life insurance policies might have riders or features that incorporate indemnity principles (e.g., critical illness riders), the core life insurance benefit itself operates on a different basis. Statement (i) is incorrect because benefit policies and indemnity policies are fundamentally different. Statement (ii) is incorrect because most life policies are benefit policies, not subject to indemnity. Statement (iv) is correct because indemnity typically does not apply to life insurance, where benefit policies are the norm. Therefore, the correct combination is that life insurance contracts are not normally subject to indemnity, and indemnity does not normally apply to life insurance where benefit policies are prevalent.

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), with premiums generally increasing with age due to the higher probability of mortality. Conversely, annuities are structured to provide income during a period of survival, meaning the payout increases with age at commencement because the annuitant is expected to live longer and receive more payments. This is directly related to the underwriting philosophy of each product, where life insurance underwriting assesses mortality risk, and annuity underwriting assesses longevity risk. The statement that annuities are based on the chances of living, while life insurance is based on the chances of dying, accurately captures this fundamental distinction.

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

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 tests the knowledge that an individual must be licensed by the IA to solicit or transact insurance business in Hong Kong. Options B, C, and D represent incorrect scenarios: Option B is incorrect because while a company can be licensed, an individual acting on its behalf still requires personal licensing. Option C is incorrect as regulatory approval from the IA is the primary requirement, not just a general business registration. Option D is incorrect because while professional indemnity insurance is a requirement for intermediaries, it does not exempt them from the fundamental licensing obligation.

This question tests the understanding of how the Hong Kong Federation of Insurers (HKFI) Standard Illustration for Participating Policies is designed to present information to policyholders. The illustration aims to provide a clear and balanced view of potential policy outcomes, including guaranteed and non-guaranteed benefits. Option A correctly identifies that the illustration is intended to show both guaranteed and projected benefits, reflecting the nature of participating policies. Option B is incorrect because while illustrations are standardized, they are not solely for comparing different insurers’ products; their primary purpose is to explain a specific policy’s performance. Option C is incorrect as the illustration’s primary goal isn’t to guarantee future returns, but to project potential outcomes based on assumptions. Option D is incorrect because while it provides information, its main function is not to serve as a contractual amendment but as an explanatory tool.

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 period. 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 duration, regardless of the annuitant’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 be for a variable period.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The scenario describes an individual acting as an intermediary without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and consumer education, it is not the licensing authority. Option C is incorrect as the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the primary licensing obligation.

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. While the policy can be renewed, the cost is higher. Convertible term insurance, on the other hand, offers the right to switch to a permanent life insurance policy without a medical examination, but the premium for the new policy will be based on the attained age and the terms of the permanent plan. The question specifically asks about extending the coverage period of a term policy without a medical exam, which is the defining characteristic of renewable term insurance, albeit with an increased premium.

The scenario describes a situation where an insurance agent recommends a new policy that significantly alters the terms of an existing policy, specifically by reducing the sum insured by more than 50%. According to the Insurance Code, a ‘replacement’ occurs when a substantial part (defined as 50% or more) of the sum insured of an existing life insurance policy lapses, is surrendered, or is reduced within 12 months of a new policy being effected. In this case, the reduction of the sum insured by 60% clearly meets this definition. The agent’s failure to properly document and explain the implications of this replacement, particularly the financial aspects and the potential disadvantage to the policyholder, constitutes a breach of the regulations designed to prevent ‘twisting’. Twisting involves misleading statements to induce a policyholder to replace a policy to their detriment. While the question doesn’t explicitly state misleading statements were made, the failure to disclose and explain the significant reduction in coverage and its implications, coupled with the substantial reduction in the sum insured, strongly suggests an action that could lead to the policyholder’s disadvantage, aligning with the spirit of preventing twisting. The Customer Protection Declaration (CPD) form is the primary tool for documenting and discussing such replacements, and its proper completion is mandated.