Paper 3 Long Term Insurance Quiz 42

The question tests the understanding of settlement options in life insurance, specifically the difference between a fixed period option and a life income option. A fixed period option provides payments for a predetermined duration, essentially acting like an annuity certain. A life income option, on the other hand, provides payments for the annuitant’s lifetime, functioning as a life annuity. The key distinction is that life annuities typically offer smaller periodic payments compared to annuities certain of the same principal amount because the insurer bears the longevity risk (the risk that the annuitant lives longer than expected). Therefore, the scenario described, where payments are made over a set duration, aligns with the characteristics of a fixed period option.

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. Option (b) describes a proprietary company owned by shareholders. Option (c) is partially correct in that policyholders share in profits, but it’s not necessarily an equal share, and the core ownership aspect is more fundamental. Option (a) is incorrect because while policyholders benefit from the company’s performance, they do not have limited liability in the same way shareholders do; their ‘liability’ is tied to their policy obligations and potential premium adjustments.

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 payout. Interest is crucial because premiums collected are invested, and the anticipated investment returns help offset the cost of claims and expenses. Expenses, such as administrative costs, commissions, and underwriting fees, are also factored into the premium to cover the operational costs of providing the insurance. Morbidity, on the other hand, relates to the incidence of sickness or non-fatal conditions, which is primarily a concern for health insurance and critical illness policies, not standard life insurance premiums.

The question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the conditions for receiving a full benefit versus a partial benefit. The provided text states that a sum equal to the accidental death benefit is usually payable for the loss of any two limbs or the sight in both eyes. Conversely, a stated proportion of the accidental death benefit is paid for the loss of one limb, the sight in one eye, or other specified lesser injuries. Therefore, losing both limbs would trigger the full accidental death benefit, while losing only one limb would result in a partial benefit.

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 disclosure point is that projected non-guaranteed benefits, such as dividends or bonuses, are contingent on the company’s dividend scales, which are determined by assumed investment returns. These projected amounts are not guaranteed, and actual payments can fluctuate, potentially being higher or lower than illustrated. Furthermore, the illustration must clearly state that under certain circumstances, these non-guaranteed benefits could even be zero. This transparency is crucial for policyholders to understand the variable nature of participating policies.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. The assignee’s rights are limited to the loan amount plus interest. Upon full repayment of the loan, the assignor regains their full rights to the policy. Crucially, during a collateral assignment, the policy owner (assignor) cannot exercise certain rights, such as taking a policy loan or surrendering the policy, as these actions would diminish 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. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Options B, C, and D describe entities or functions that are not directly responsible for the licensing of insurance intermediaries in Hong Kong.

The scenario describes a situation where a policyholder failed to disclose symptoms that were later diagnosed as nasopharyngeal carcinoma. The insurer attempted to repudiate the claim based on material non-disclosure. However, the Complaints Panel ruled in favour of the claimant. One of the key reasons for this ruling was the application of the incontestability provision. This provision, typically effective after a certain period (in this case, over two years), prevents an insurer from voiding a policy due to misrepresentation or non-disclosure, unless fraud can be proven. Since no evidence of fraud was presented, the incontestability provision shielded the policy from being voided on the grounds of non-disclosure. The question tests the understanding of how the incontestability provision operates as a defence against claims of breach of utmost good faith, particularly when fraud is not involved.

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 exceptions. These exceptions 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 which policy types are exempt from the FNA requirement. Option A correctly identifies a policy type that is explicitly listed as an exception in the Initiative.

The Standard Illustration for universal life (non-linked) policies aims to provide a clear, minimum summary of benefits. A key aspect of this illustration is its focus on the basic plan, explicitly excluding any additional riders or supplementary benefits. This ensures that the prospective policyholder understands the core product’s performance without the complexity of optional add-ons, which could potentially alter the overall illustration’s outcome. Therefore, the illustration is designed to represent the basic plan only, excluding riders and additional benefits.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically concerning the loss of limbs and sight. The core concept is that while ‘dismemberment’ literally means limb loss, insurance policies often broaden this to include loss of sight. The benefit structure usually involves a higher payout for the loss of two limbs or both eyes, and a reduced payout for the loss of one limb or one eye. The scenario describes a situation where an accident results in the loss of one hand and the sight in one eye. According to typical policy provisions, the loss of one limb and the loss of sight in one eye would trigger a benefit that is a stated proportion of the accidental death benefit, often less than the full accidental death benefit but more than a benefit for a single, lesser injury. Option A correctly reflects this tiered benefit structure for combined limb and sight loss.

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. A life income option, on the other hand, pays for the annuitant’s lifetime.

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 amendments that add or modify coverage) 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 ensures that all terms and conditions are clearly documented and agreed upon, providing certainty and preventing disputes. Options B, C, and D describe other important aspects of policy provisions, such as the authority to make changes, the requirement for written changes, and the need for policyowner agreement, but they do not define what constitutes the entire contract itself.

This question tests the understanding of the core 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, the most crucial question an intermediary should ask is about the policyholder’s objectives and what they want the insurance to achieve for their loved ones. Option (a) focuses on financial capacity, which is important but secondary to understanding the need. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a subjective question that doesn’t elicit specific information about the policyholder’s financial planning goals.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) emphasizes the importance of a robust underwriting process to ensure the financial stability of the insurer and fair treatment of policyholders. A key aspect of this is the accurate assessment of risk. When an applicant provides incomplete or potentially misleading information regarding their health history, the underwriter’s primary responsibility, as guided by the principle of prudent risk management, is to seek clarification and verify the accuracy of the information. This ensures that the policy is priced appropriately based on the true risk profile and that the insurer does not inadvertently assume a greater risk than anticipated, which could jeopardize its solvency and ability to meet future claims. Directly issuing the policy without addressing the discrepancies would be a violation of sound underwriting practices and regulatory expectations.

A Conditional Premium Receipt (CPR) provides temporary coverage from the date of application, contingent upon the applicant being found insurable on standard terms at the time of application. This means that if the applicant is later deemed uninsurable or requires a higher premium due to their health status at the time of application, the coverage provided by the CPR may not be valid or may be adjusted accordingly. The other options describe different insurance concepts: a Cover Note is a temporary proof of insurance in general insurance, a Binding Premium Receipt is the life insurance equivalent of a cover note but doesn’t necessarily confirm insurability on standard terms, and a Cooling-Off Period allows policy cancellation within a specified timeframe after issuance.

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. The scenario describes an individual 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: the Hong Kong Monetary Authority (HKMA) regulates banks, the Securities and Futures Commission (SFC) regulates the securities and futures markets, and the Companies Registry is responsible for company registration, not the licensing of insurance intermediaries.

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 paid out immediately upon declaration. Settlement options relate to how the final policy proceeds are paid, not the nature of bonuses. Subrogation is a principle applicable to indemnity insurance, not life insurance. A rider is an amendment to a policy, not a component of the bonus structure.

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 intermediary to declare that they have provided the customer with all necessary information regarding the product, including its nature, risks, and benefits. This declaration is a fundamental aspect of the intermediary’s duty of care and adherence to regulatory requirements aimed at protecting consumers. Option B is incorrect because while disclosure is vital, the form specifically focuses on the intermediary’s declaration of having provided this information, not the customer’s acknowledgment of receipt. Option C is incorrect as the form is not primarily for the intermediary to confirm their understanding of the product, but rather to declare their actions in informing the customer. Option D is incorrect because while the form contributes to compliance, its core purpose is the declaration of information provision to the customer, not a general statement of regulatory adherence.

This 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 is a trigger, the specified life expectancy of 12 months or less is a crucial condition that is omitted. Option C is incorrect as the syllabus does not mention a requirement for the insured to be unable to perform a certain number of activities of daily living for CI benefits; this is a characteristic of Long-Term Care benefits. Option D is incorrect because while a medical procedure can be a trigger, the syllabus specifies a ‘specified medical procedure,’ and the option is too general, implying any medical procedure.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the policy’s cash value. These deductions are specifically mentioned in the syllabus as adjustments for items like paid-up additions, outstanding policy loans and their accrued interest, and any advance premium payments. Therefore, the Net Cash Value is not simply the stated cash value but a reduced amount reflecting these financial adjustments.

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 mandates that insurers clearly disclose specific information to policyholders, particularly concerning the nature of the insurance product, its benefits, risks, and any associated fees or charges. This proactive disclosure is designed to prevent misrepresentation and to empower customers to make well-informed decisions, thereby upholding the principles of fair dealing and consumer protection within the insurance industry in Hong Kong. The form’s primary objective is to create a documented record of the information provided and understood by the customer.

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 to facilitate accurate disclosure, not to interpret the underwriting decision. Option (d) is incorrect because the intermediary’s primary duty is to the accuracy of the information provided, not to expedite the process by omitting details.

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 joint mortgage where the surviving spouse needs funds to pay off the remaining balance. The other options describe different types of policies or riders: a key person policy insures an individual whose death would financially impact a business, a level term insurance provides a fixed death benefit for a specified period, and a life income annuity with a period certain provides income for life with a guaranteed payout period.

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 the need to verify the client’s financial capacity and the policy’s suitability, which are core KYC principles in this context. Option B is too narrow, focusing only on the initial premium payment without considering ongoing affordability. Option C is relevant to anti-money laundering but not the primary focus of KYC for policy suitability. Option D is a general compliance requirement but doesn’t specifically address the nuances of assessing a client’s financial standing for long-term insurance.

The CIB (Confederation of Insurance Brokers) requires its members to conduct a thorough needs analysis before recommending any long-term insurance policies. This analysis must consider the client’s existing financial commitments, income, and priorities. Crucially, if a client already has existing long-term insurance policies (whether in force, paid-up, suspended, or under a premium holiday), the CIB member must first advise on appropriate options within those existing policies that align with the identified needs. Only after exploring these existing policy options should the CIB member proceed to recommend new or additional long-term insurance policies. This ensures that clients are fully informed about how to leverage their current coverage before committing to further financial obligations, aligning with the principle of acting in the client’s best interest.

Family Income Insurance is a type of decreasing term insurance designed to provide a steady income stream to beneficiaries for a specified period after the insured’s death. Unlike a standard decreasing term policy where the death benefit reduces over time, Family Income Insurance pays a monthly benefit for the remainder of a predetermined term. This structure ensures that the surviving spouse or dependents receive a consistent income, effectively replacing the deceased’s earnings for a defined duration, rather than a lump sum that might be depleted. The question tests the understanding of how this specific product differs from other term insurance variations by focusing on its income-replacement feature over a set period.

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 feature distinguishing it from non-renewable term insurance.

The question tests the understanding of the principle of indemnity and its application to different types of insurance. Life insurance is generally not a contract of indemnity, meaning the payout is not directly tied to the financial loss suffered by the beneficiary. Instead, it’s a contract to pay a fixed sum upon the occurrence of a specific event (death). Therefore, having multiple life insurance policies is permissible and each policy will pay out its full sum assured independently, without the principle of contribution or average applying to reduce the payout. This contrasts with general insurance (like property or motor insurance) where the principle of indemnity is paramount, and multiple policies would lead to contribution or average to prevent over-indemnification.

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 presents a scenario where an individual is acting as a referral agent for an insurance company without holding a license. This action constitutes a breach of the regulatory requirements, as only licensed individuals are permitted to engage in such activities. The explanation highlights that the Insurance Companies Ordinance mandates licensing for anyone involved in the solicitation, negotiation, or arrangement of insurance business, underscoring the IA’s role in enforcing these provisions.