Paper 3 Long Term Insurance Quiz 37

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 standard yearly renewable critical illness policy without cash value is exempt from requiring an FNA form.

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 relevant legislation. Options B, C, and D describe entities or activities that are regulated but do not directly address the core requirement for an individual acting as an insurance intermediary to be licensed by the IA.

Renewable term insurance allows the policyholder to extend the coverage period without needing to undergo a new medical examination. However, the premium for the renewed term is recalculated based on the insured’s age at the time of renewal, which will be higher than the initial premium. This is a fundamental characteristic of renewable term policies, designed to reflect the increased risk associated with an older insured individual. The other options describe different policy features: convertible term insurance allows conversion to a permanent plan, endowment insurance pays out upon survival or death within a term, and whole life insurance provides coverage for the entire lifespan.

The Fixed Period Option, also known as an annuity certain, involves the insurer paying out the policy proceeds in equal installments over a predetermined duration. This means the total payout is fixed, and the payments cease once the specified period ends, regardless of whether the entire principal and accumulated interest have been fully disbursed. The Life Income Option, conversely, provides payments for the entire lifetime of the payee, with the installment amounts typically being smaller than those in a fixed period option because the duration of payments is uncertain and potentially much longer. The Interest Option only pays out the interest earned on the principal, leaving the principal intact, while the Fixed Amount Option pays a set amount until the proceeds are exhausted, which could be a shorter or longer period than a pre-defined fixed period.

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 its cash value, nor is it converted to a paid-up policy with a reduced death benefit. The question specifically asks about the outcome when the net cash value is used to buy term insurance for the original face amount for a period the cash value can sustain, which directly describes extended term insurance.

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 afford the premiums over the policy’s duration and ensuring the policy aligns with their stated financial objectives and risk tolerance. Option (a) correctly identifies that a client’s capacity to sustain premium payments and the policy’s suitability for their financial goals are key considerations under these procedures. Option (b) is incorrect because while understanding the client’s occupation is part of KYC, it’s not the primary focus for assessing affordability and suitability in the context of long-term insurance. Option (c) is incorrect as the client’s marital status, while potentially relevant in some financial contexts, is not a direct or primary requirement for assessing the suitability and affordability of a long-term insurance policy under the specified guidance. Option (d) is incorrect because while the client’s investment experience is relevant for investment-linked products, the core KYC for long-term insurance, as per the guidance, focuses more broadly on financial capacity and policy purpose, not solely on investment acumen.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between major and minor injuries and the corresponding benefit payouts. The scenario describes a policyholder suffering a specific injury (loss of a thumb) which falls under the category of ‘lesser injuries’ as defined in accident benefit schedules. These lesser injuries usually have a benefit payout that is a stated proportion of the main accidental death benefit, rather than the full benefit or a benefit tied to the loss of a major limb or sight. Option A correctly identifies this proportional payout for lesser injuries. Option B is incorrect because while dismemberment covers loss of limbs, the benefit for a thumb is typically a fraction of the full benefit. Option C is incorrect as ‘double indemnity’ applies to specific circumstances like public transport accidents, not to the severity of the injury itself. Option D is incorrect because the scenario does not involve death, so the death benefit is not relevant here.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) outlines the principles and practices expected of insurers when assessing and accepting long-term insurance risks. A key aspect of this guideline is the emphasis on ensuring that underwriting decisions are based on sound actuarial principles and a thorough assessment of the risk presented by the applicant. This includes considering factors that could materially affect the mortality or morbidity experience of the insured pool. The guideline mandates that insurers must have robust underwriting procedures in place to identify and manage risks, thereby protecting policyholders and maintaining the financial stability of the insurer. Specifically, it stresses the importance of accurate risk assessment to prevent adverse selection, where individuals with a higher-than-average risk are more likely to purchase insurance, leading to potential financial strain on the insurer if premiums are not adequately priced. Therefore, the primary objective of these underwriting guidelines is to ensure that the insurer can accurately assess and price risks, maintain a healthy risk pool, and fulfill its contractual obligations to policyholders.

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 the importance of proper authorization before conducting any insurance-related business. The other options represent incorrect regulatory bodies or incorrect licensing prerequisites, which would not be applicable in this context.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually. These illustrations should reflect the current conditions and future outlook. This ensures policyholders receive accurate and relevant information about their participating policies, especially concerning non-guaranteed elements like dividends and their impact on future premiums or benefits. The guideline aims to enhance transparency and allow policyholders to make informed decisions regarding their long-term insurance contracts.

Section 9 of the Law Amendment and Reform (Consolidation) Ordinance governs the assignment of legal choses in action, including interests in insurance contracts. A key requirement for a valid legal assignment is that the chose in action must be present, not future. While the actual enjoyment of an insurance benefit may be deferred to a future event, the policyholder’s rights under the contract are considered present and assignable. This is because the right to receive the benefit, even if contingent, exists at the time of assignment. Options B, C, and D describe situations or concepts that are not the primary legal basis for the assignability of a life insurance interest under the ordinance. Option B describes a future interest, which is generally not assignable. Option C refers to a gift, which is a type of assignment but not the underlying legal principle for assignability. Option D describes a dividend option, which is unrelated to the assignment of the policy’s core benefits.

When recommending a regular premium policy, a Certified Insurance Broker (CIB) member must ensure that the client understands and confirms their financial commitment. This includes not only the regular premiums but also any premiums for riders. Furthermore, if the premium payment term extends beyond the client’s stated retirement age, the CIB member must ascertain and document the client’s intended source of funds for these later payments. The client must then provide a written declaration confirming their comfort with the premium-to-disposable income ratio, their agreement to the overall financial commitment, and their ability to meet premium payments beyond their target retirement age, if applicable. This comprehensive approach ensures transparency and client understanding of long-term financial obligations.

A joint-life policy that pays on the first death is designed to provide a payout when the first of the insured individuals passes away. This is often used for situations like covering a mortgage where the loan needs to be repaid upon the death of either spouse. The term ‘joint-life basis’ refers to insuring multiple lives under a single policy. ‘Level Term Insurance’ refers to a policy where the death benefit remains constant throughout the term. ‘Key Person Life Insurance’ is specifically for businesses insuring a crucial employee. ‘Mortgage Redemption Insurance’ is a type of decreasing term insurance linked to a mortgage, often on a joint-life basis, but the core concept of insuring multiple lives under one policy that pays on the first death is the defining characteristic.

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 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 regulatory bodies or incorrect licensing prerequisites.

The question tests the understanding of the implications of a policyholder dying within the grace period before paying a premium. According to the provided text, if the life insured dies within the grace period before payment of the premium, the premium due will be deducted from the death benefit payable. This means the policy remains in force, but the outstanding premium reduces the payout to the beneficiary. Option (b) is incorrect because the grace period is a benefit that allows for continued coverage, albeit with a deduction for unpaid premiums. Option (c) is incorrect as it misinterprets the consequence of death during the grace period; while the policy is technically still active, the unpaid premium impacts the benefit. Option (d) is incorrect because it suggests the policy lapses immediately upon death within the grace period without deduction, which contradicts the stated provision.

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 valid 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 requiring a license. Therefore, the individual is acting unlawfully.

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 legally required to be presented. Option C is incorrect as the primary purpose of customization is to tailor the illustration to the specific product and customer, not to simplify it to the point of omitting crucial details. Option D is incorrect because the inclusion of additional information is permitted, but it must be relevant and not misleading, not simply any information the company wishes to add.

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.

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 the necessary license constitutes a breach of the law and can lead to penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and promotion, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFSA) 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.

This question tests the understanding of decreasing term insurance and its specific applications. Credit life insurance is designed to cover the outstanding balance of a loan, which naturally decreases over time as payments are made. Therefore, the death benefit of this type of insurance is structured to mirror this decreasing debt. Family income benefit, while also a form of decreasing benefit over time, typically pays a regular income for a specified period rather than covering a specific debt balance. Mortgage redemption insurance is similar in that it covers a decreasing debt, but it is specifically tied to a mortgage and the benefit is paid to cover the outstanding mortgage balance. Level term insurance provides a constant death benefit throughout the term, which is not suitable for a reducing debt.

The Illustration Document for Investment-linked Policies (Version 2) issued by the SFC mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the nature of the returns they can expect. Non-guaranteed benefits, such as projected investment growth, are subject to market fluctuations and are not assured. Therefore, any illustration must explicitly label these components to avoid misleading the consumer about the certainty of the projected outcomes. The other options describe aspects that might be present in illustrations but do not represent the primary regulatory requirement for distinguishing benefit types.

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 in profits. The question tests the understanding of the fundamental difference in premium pricing between these two types of life insurance contracts, directly referencing the concept of ‘PAR or NON-PAR’ as a significant factor influencing premium rates.

When a policy is issued with the notation ‘age not admitted,’ it signifies that formal verification of the policyholder’s age was not provided at the policy’s inception. While some insurers might waive this requirement upon policy maturity, it is crucial to request proof of age. A misstatement of age, even if discovered later, can significantly alter the policy benefits, such as the sum assured or premium amounts, potentially leading to underpayment or overpayment of benefits. Therefore, verifying age is a critical step in ensuring the policy’s accuracy and the correct payout of benefits, especially at maturity.

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, risks, and costs. 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 such products in Hong Kong.

The calculation of life insurance premiums is a complex process that considers several key factors to ensure the insurer can meet its future obligations. Mortality refers to the probability of death at various ages, which is fundamental to life insurance as it directly impacts the likelihood of a claim. Interest is crucial because premiums collected are invested, and the expected investment returns help offset the cost of benefits. Expenses, including acquisition costs, administrative overhead, and commissions, are also factored into the premium to cover the operational costs of providing insurance. Morbidity, on the other hand, relates to the incidence of sickness or disability, which is primarily a concern for health and disability insurance, not the core calculation of life insurance premiums, although it might be relevant for certain riders.

This question tests the understanding of 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 the banking sector, not insurance intermediaries. Option D is incorrect because while professional bodies may offer certifications, they do not confer the legal right to act as an insurance intermediary; that authority rests solely with the IA.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments. When premiums are paid, a portion is used to purchase units in a fund. The policy’s value then fluctuates based on the market value of these units. This means the policyholder bears the investment risk. The question tests the understanding of how the value of a unit-linked policy is determined and the direct link to investment performance, distinguishing it from traditional policies where the insurer manages the investment risk.

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 component of this illustration is the clear distinction between guaranteed and non-guaranteed benefits. Specifically, it mandates that projected non-guaranteed benefits, such as dividends or bonuses, must be explicitly stated as not guaranteed and subject to change based on factors like the company’s dividend scales and assumed investment returns. The illustration must also detail how these non-guaranteed elements are treated under different investment scenarios (optimistic and pessimistic) and the implications for surrender values and death benefits. The requirement to state that non-guaranteed benefits may be zero under certain circumstances is a crucial disclosure to manage customer expectations and ensure transparency regarding the variability of these components.

This question assesses the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the responsibilities of licensed insurance agents and brokers under the Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation. The scenario highlights a common ethical dilemma where an agent might be tempted to offer incentives beyond what is permitted to secure business. The relevant regulations prohibit the offering of inducements that are not disclosed to the insurer or that are not part of the approved commission structure. Such practices are considered mis-selling and can lead to disciplinary actions by the Insurance Authority. Option A correctly identifies the prohibition against offering undisclosed or unauthorized inducements. Option B is incorrect because while disclosure to the client is important, the primary regulatory concern here is the undisclosed nature of the inducement to the insurer and its potential to distort fair competition. Option C is incorrect as the focus is on the agent’s conduct, not solely on the insurer’s internal controls, although insurers also have oversight responsibilities. Option D is incorrect because while client consent is a factor in many insurance transactions, it does not legitimize the offering of prohibited inducements.

The CIB Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) mandates that CIB Members must conduct a thorough assessment of a client’s financial situation and existing insurance policies before recommending any new or additional long-term insurance. This includes understanding their financial commitments, income, needs, and priorities. If a client already has a long-term policy that is in force, paid-up, suspended, or under a premium holiday, the CIB Member must first advise on appropriate options within that existing policy that align with the identified needs. Only after considering these existing arrangements should a recommendation for a new or additional policy be made. This ensures that clients are not oversold or recommended products that do not complement or address their current financial landscape and insurance coverage.