Paper 3 Long Term Insurance Quiz 39

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. In such cases, the assignee’s rights are limited to the amount of the loan plus any accrued interest. The assignor retains the right to reclaim full ownership of the policy once the loan is fully repaid. Crucially, during the period of a 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 would diminish the security provided to the assignee.

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 Even though the applicant underwent a medical examination, the insurer rescinded the policy because the examination did not fully reveal pre-existing conditions that were material to the risk.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 how the Insurance Companies Ordinance (Cap. 41) regulates the business of insurance in Hong Kong, specifically concerning the licensing and authorization requirements for entities conducting insurance business. The ordinance mandates that any person carrying on insurance business in Hong Kong must be authorized by the Insurance Authority. This authorization process ensures that insurers meet stringent financial, managerial, and operational standards, thereby protecting policyholders and maintaining the stability of the insurance market. Options B, C, and D describe activities or entities that are either not directly related to the core licensing requirement for conducting insurance business or are regulated under different frameworks, such as the Securities and Futures Ordinance for investment-linked products or general business registration.

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, explicitly excluding any riders or additional benefits. This ensures clarity and focuses the prospective policyholder on the core product features. The scenario presented describes a situation where an illustration includes benefits from a rider, which directly contradicts this fundamental requirement of the Standard Illustration. Therefore, such an illustration would not be compliant.

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 disclosure obligations unless the examination is specifically designed to uncover all relevant medical history. The Personal Data (Privacy) Ordinance is also relevant, requiring insurers to explain the need for tests and inform individuals of their results, but this does not negate the applicant’s duty of disclosure under common law and insurance principles.

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. This aligns with the definition of a reversionary interest. Option B describes a ‘Rider’, which is an amendment to a policy. Option C refers to ‘Settlement Options’, which are choices for payout of policy proceeds. Option D describes ‘Subrogation’, a principle that allows an insurer to pursue rights against a third party, which is not applicable to life insurance.

Section 64A of the Insurance Ordinance (Cap. 41) in Hong Kong specifically grants an insurable interest to a parent or guardian in the life of a minor (a person under 18 years of age). While blood relationships like spouse, parent, child, grandparent, and grandchild generally establish insurable interest in many jurisdictions, Hong Kong law, as stipulated in the Insurance Ordinance, explicitly extends this to a parent or guardian over a minor, irrespective of direct blood relation in some guardianship scenarios. The question tests the understanding of statutory extensions to the general principles of insurable interest in Hong Kong.

When an insurance office receives a complaint regarding potential twisting, the Code of Conduct mandates a structured response. The initial step involves acknowledging the complaint and informing the client about the investigation process. Specifically, the office must commit to providing the client with an update on its findings and any proposed resolutions within a 30-day timeframe from the complaint’s receipt. This ensures transparency and manages client expectations during the investigation.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the licensing or regulatory landscape. Option B is incorrect because while 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 Companies Registry is responsible for company registration, not for licensing insurance intermediaries. Option D is incorrect because while professional bodies may offer certifications, they do not confer the legal authority to act as an insurance intermediary in Hong Kong; that authority comes solely from the IA’s license.

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 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 soliciting insurance products. Failure to obtain a license before engaging in these activities constitutes a breach of the Ordinance and can lead to penalties. Therefore, a person intending to solicit insurance business must first be licensed.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the projected surrender values and death benefits. According to the regulations, illustrations must present these values at specific intervals: the end of the first five years, and then every fifth year thereafter until maturity or policy end. The assumed rates of return are also specified, with Version 1 requiring 0%, 3%, 6%, and 9%, and Version 2 requiring 0%, 3%, and 6%. The explanation should highlight that the illustration must include policy-level charges but exclude fund management charges. Furthermore, it must contain specific cautionary statements about the relationship between investment returns, policy termination, and the potential loss of premiums and accrued benefits under adverse scenarios, including automatic early termination. The provided options are designed to test the recall of these specific requirements, with the correct answer encompassing all these essential disclosure elements.

This question assesses the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensing and the implications of failing to meet these standards. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with guidelines issued by the Hong Kong Insurance Authority (IA), stipulate that individuals and companies acting as insurance agents or brokers must be licensed. Operating without a valid license is a contravention of these regulations, leading to potential penalties such as fines and prohibition from conducting regulated activities. Option B is incorrect because while the IA oversees the industry, the primary legislation defines the licensing requirements. Option C is incorrect as the focus is on licensing for intermediaries, not directly on policyholder protection measures, although licensing contributes to it. Option D is incorrect because while professional indemnity insurance is a requirement for many intermediaries, it is a condition of licensing, not the sole determinant of whether an activity is regulated.

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 medical/accident cover, 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* require an FNA, implying the others are exempt. A refundable hospital cash policy is explicitly listed as an exclusion, meaning it does not require an FNA.

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 the inclusion of explanatory notes and warnings. Specifically, point (v) of the major provisions states that projected non-guaranteed benefits are based on the company’s current dividend/bonus scales, which are influenced by assumed investment returns and are not guaranteed. The actual amounts payable can fluctuate, potentially being higher or lower than illustrated. Furthermore, it explicitly mentions that under certain circumstances, these non-guaranteed benefits might even be zero. This directly addresses the core concept of non-guaranteed benefits in participating policies and the inherent variability associated with them.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the licensing or regulatory oversight. 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 grant the legal authority to act as an insurance intermediary; that authority comes solely from the IA’s license.

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 owned by shareholders is the definition of a proprietary or stock company.

The question tests the understanding of the principle of indemnity and its application to different types of insurance. The principle of indemnity aims to restore the insured to the financial position they were in before the loss occurred, preventing them from profiting from the insurance. Life insurance, however, is not typically subject to this principle. In life insurance, the sum assured is a pre-agreed amount that is paid upon the occurrence of the insured event (death or survival to a certain age), regardless of the actual financial loss incurred. Therefore, it is permissible and common for an individual to hold multiple life insurance policies, and each policy will pay out its full sum assured independently. This contrasts with general insurance (like fire or motor insurance), where the principle of indemnity applies, and multiple policies would share the loss proportionally to prevent over-indemnification.

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 basis between PAR and NON-PAR policies, directly relating to the concept of policyholder participation in profits and its impact on pricing.

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

This question tests the understanding of underwriting actions for substandard risks, specifically focusing on the concept of a ‘debt on policy’ or ‘lien’. The scenario describes an applicant with a medical condition that leads to an increased mortality risk. The insurer’s response of reducing the sum assured by a specific amount that decreases over time, while still offering coverage, aligns with the description of a decreasing debt. Option (b) describes loading the premium, which is a different method. Option (c) refers to specific exclusions, which is also a distinct underwriting action. Option (d) describes deferring a decision, which is a temporary measure, not a permanent underwriting adjustment like a debt on policy.

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 primary driver for assessing the suitability and affordability of a long-term insurance policy under this guidance. Option (d) is incorrect because while the client’s investment experience might be relevant for investment-linked products, the core KYC for long-term insurance, as per the guidance, focuses more broadly on financial capacity and policy alignment.

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 a specific type of decreasing term insurance tailored to mortgage payments, but credit life insurance is a broader category that encompasses the principle of covering a reducing debt. Level term insurance provides a constant death benefit, which is not suitable for covering a declining loan balance.

The question tests the understanding of the conditions under which a Critical Illness (CI) benefit can be paid. According to the syllabus, a CI benefit is payable when the insured is diagnosed with a specified disease, a terminal illness with a life expectancy of 12 months or less, or requires a specified medical procedure. Option A correctly identifies the diagnosis of a specified disease as a trigger for the CI benefit. Option B is incorrect because while a terminal illness with a life expectancy of 12 months or less is a trigger, the scenario does not mention this condition. Option C is incorrect as the scenario does not mention the need for a specified medical procedure. Option D is incorrect because the syllabus states that CI benefits are typically paid as a lump sum, not as a monthly income stream, and the scenario does not provide information about the policy’s payout structure.

The question tests the understanding of premium waiver provisions in the context of Long-Term Care (LTC) benefits. 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. This waiver is a key feature designed to alleviate the financial burden on the policyholder when they are actively receiving benefits.

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 intermediaries. An individual must be licensed by the IA to conduct regulated activities, such as advising on or arranging insurance contracts. The question highlights a scenario where an individual is acting as a referral agent for an insurance company without holding the necessary license. This action constitutes a breach of the regulatory requirements, as referral activities, when they involve providing advice or information that could influence a customer’s decision, are considered regulated activities. Therefore, the individual is acting unlawfully and is subject to penalties under the relevant legislation. The other options are incorrect because while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business is the IA license. Furthermore, the Insurance Companies Ordinance is the foundational legislation, and while specific guidelines exist, the core prohibition stems from this ordinance.

The Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) emphasizes the importance of suitability and appropriateness when recommending long-term insurance products. It mandates that intermediaries must assess the client’s financial situation, needs, and objectives to ensure the recommended product aligns with these factors. This includes understanding the client’s risk tolerance, investment horizon, and any specific insurance needs. The note also stresses the need for clear and transparent disclosure of product features, benefits, risks, and costs. Therefore, a recommendation that prioritizes a product solely based on its high commission potential, without a thorough client assessment, would be contrary to the principles outlined in the guidance.

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 specific characteristic of fixed-term, life-independent payments.

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. The intermediary’s duty is to facilitate accurate disclosure by the applicant, not to interpret or omit information. Therefore, advising the applicant to provide a comprehensive explanation for a pre-existing condition, including relevant dates, aligns with the principle of full disclosure of material facts.

The Illustration Document for Investment-linked Policies (Version 2) mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. Non-guaranteed benefits, such as projected investment growth, are subject to market fluctuations and are not assured. Therefore, it is crucial for policyholders to understand that these projected figures are estimates and not contractual guarantees. The document emphasizes transparency in presenting both guaranteed and projected values to avoid misleading consumers about the potential returns and risks associated with investment-linked products.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the assumed rates of return. According to the regulations, illustrations for non-linked policies should present projected surrender values and death benefits based on a set of assumed rates of return. Version 1 templates require four rates (0%, 3%, 6%, and 9%), while Version 2 templates require three rates (0%, 3%, and 6%). The key is that for rates other than 0%, these are maximum rates, and insurers have the discretion to illustrate lower rates. The question specifically asks about the rates that must be included, and the correct answer reflects the requirement for Version 1 templates, which includes 0%, 3%, 6%, and 9%. The other options present incorrect combinations or omit necessary rates.