Paper 3 Long Term Insurance Quiz 46

This question tests the understanding of how insurers categorize risks for premium determination. A risk that presents no unusual health factors and can be insured at the standard premium rate based on demographic data is classified as a standard risk. Sub-standard risks require adjustments to premiums or terms due to higher mortality expectations. Declined risks are deemed uninsurable by the company. Preferred risks, while a recognized category by some insurers, represent individuals with demonstrably better-than-average health prospects, often receiving discounts, which is not the case described.

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 acts as an intermediary without the necessary authorization, which is a breach of the regulatory requirements. Understanding the IA’s role and the necessity of obtaining a license to conduct insurance intermediary activities is fundamental for anyone operating within the Hong Kong insurance market.

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. The question presents a scenario where an individual is soliciting insurance business without this necessary authorization, which constitutes a breach of the relevant legislation. The explanation highlights that operating without a license is a serious offense, and the IA has the power to impose penalties, including fines and prohibition from carrying out insurance business. The other options are incorrect because while compliance with ethical standards and maintaining professional competence are crucial, they do not negate the fundamental requirement of holding a valid license to conduct insurance business.

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 similar debt-reduction principles for various types of loans. Level term insurance provides a constant death benefit, which is not suitable for covering a reducing debt.

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 a two-year period after the policy’s inception, prevents an insurer from voiding a policy due to misrepresentation or non-disclosure, unless fraud can be proven. Since the policyholder died more than two years after the policy came into force and no evidence of fraud was presented, the incontestability provision barred the insurer’s defence. The question tests the understanding of how the incontestability provision interacts with the duty of utmost good faith and the exception for fraud.

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 and 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 grant the legal authority to act as an insurance intermediary; 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 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 solicit or transact insurance business. 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 other options describe activities that are either permissible for unlicensed individuals in specific contexts (e.g., providing general information without soliciting business) or are irrelevant to the core licensing requirement for transacting insurance business.

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. 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 life of the insured.

The CIB’s Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) emphasizes that CIB Members must conduct a thorough assessment of a client’s financial situation and existing insurance policies before recommending 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 align with their current financial standing or existing coverage.

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 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 before engaging in such activities constitutes a breach of the regulatory requirements, leading to potential penalties. The other options are incorrect because while professional bodies may offer certifications, they do not confer the legal right to conduct insurance business. The Hong Kong Federation of Insurers is an industry association, not a licensing authority. The Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, which is a specific type of financial product, but the general licensing for insurance business falls under the IA.

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 interest is described as ‘reversionary,’ meaning the rights are recognized now, but the full benefit is realized later. Therefore, an assignment of a life insurance policy is valid because the interest is considered present, even if the payout is contingent on a future event.

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 age verification. This is because any misstatement of age, even if discovered later, can significantly alter the policy benefits, potentially leading to underpayment or overpayment of claims or maturity proceeds. This aligns with the principle of accurate risk assessment and fair contract fulfillment, as mandated by insurance regulations in Hong Kong, which emphasize transparency and correctness in policy terms and payouts.

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 scenario describes a situation where the policyowner has ceased premium payments, and the insurer needs to apply a non-forfeiture option. Extended term insurance is the option where the original death benefit is maintained for a limited period.

This question tests the understanding of the core purpose of life insurance from the perspective of a client’s needs, a fundamental concept for insurance intermediaries. 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 client’s objectives for the insurance coverage. Option (a) focuses on the client’s financial capacity, which is important but secondary to understanding their needs. Option (b) is self-serving for the intermediary and unprofessional. Option (c) is a subjective question that doesn’t elicit specific information about the client’s goals. Option (d) addresses the premium, which is a consequence of the coverage amount and type determined by the client’s needs, not the starting point for understanding those needs. The question “What do you want the insurance to do for you?” directly addresses the client’s desired outcomes and financial protection goals, guiding the intermediary to recommend suitable products.

This question tests the understanding of the principle of indemnity in insurance, specifically its application to life insurance. Indemnity aims to restore the insured to the financial position they were in before the loss, without allowing for profit. Life insurance, however, pays a predetermined sum upon the occurrence of a specific event (death or survival), which is not directly tied to a quantifiable financial loss in the same way as property or casualty insurance. Therefore, life insurance contracts are generally considered benefit policies rather than indemnity policies. Option (a) is incorrect because while some life insurance might have elements that resemble indemnity, it’s not the primary principle. Option (b) is incorrect because it’s too absolute; while benefit is the core, the statement implies no other aspect is relevant. Option (d) is incorrect because it mischaracterizes the relationship, suggesting indemnity applies to some life policies while benefit policies are prevalent, which is a confused understanding of the distinction.

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 different regulatory bodies or concepts that are not directly applicable to the licensing of insurance intermediaries in this context.

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 is acting as an intermediary without the necessary authorization, which is a contravention of the Ordinance. The correct answer emphasizes the need for a license issued by the IA to lawfully conduct insurance intermediary activities. The other options present incorrect regulatory bodies or incorrect licensing prerequisites, aiming to test the candidate’s knowledge of the specific authority and the fundamental requirement of a license.

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 licensing and regulating insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business. The scenario describes an individual acting as a referral agent, which, depending on the nature and extent of the referral, could be construed as soliciting or transacting insurance business, thus requiring a license. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, insurance intermediaries are regulated by the IA. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the licensing process itself.

The question tests the understanding of the Duty of Disclosure, a fundamental principle in insurance contracts. This duty requires all material facts relevant to the risk being insured to be revealed by both parties before the contract is concluded. Failing to disclose such facts, even if not explicitly asked, can render the contract voidable by the insurer. Option (a) accurately reflects this obligation by stating that all material facts must be revealed, irrespective of whether they were specifically requested. Option (b) is incorrect because while the insurer also has a duty to disclose, the primary focus of the question is on the policyholder’s obligation. Option (c) is incorrect as the duty extends beyond just answering questions posed by the insurer; it’s an active obligation to volunteer relevant information. Option (d) is incorrect because the duty of disclosure applies to all material facts, not just those that might increase the premium.

A deferred annuity is a contract where the commencement of benefit payments is postponed to a future date, typically specified by a certain age or a set period after the contract’s inception. This contrasts with immediate annuities where payments begin shortly after purchase. The core characteristic is the deferral of income distribution.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually. These illustrations must reflect the most current policy conditions and future outlook. This ensures that policyholders have accurate and relevant information regarding 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 assist policyholders in understanding the potential performance of their investments under various scenarios.

This question tests the understanding of the “cooling-off” period requirement under the Insurance Ordinance (Cap. 41) for certain types of insurance policies, specifically those sold through distance marketing. The cooling-off period allows policyholders a window to reconsider their purchase and cancel the policy without penalty, provided certain conditions are met. The duration of this period and the types of policies it applies to are crucial aspects of consumer protection in the insurance industry. The scenario highlights a common situation where a policyholder might wish to cancel shortly after purchase, making the understanding of these regulatory provisions essential for insurance intermediaries.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it ensures its continuity by waiving future premium payments. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific physical loss like blindness in both eyes or loss of use of limbs. The scenario provided illustrates a common point of contention: the insurer’s interpretation of ‘total disability’ versus the insured’s expectation, particularly when the policy uses a restrictive definition like ‘unable to engage in any gainful occupation’. In the given case, the insurer’s stance, supported by the Complaints Panel, was that the insured’s ability to seek alternative government employment meant he was not totally disabled according to the policy’s specific, narrow definition, even though he could no longer perform his duties as a fireman.

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 age at the time of renewal, which will be higher than the initial premium. This is a key characteristic that distinguishes it from other term insurance types. While it offers flexibility, the increased premium due to attained age is a fundamental aspect of its pricing structure.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The scenario describes an individual acting as a broker without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing of intermediaries. Operating as an insurance broker without a valid license is a contravention of the Ordinance, and the IA has the authority to take enforcement actions, which can include imposing penalties or prohibiting such activities. Therefore, the most appropriate action for the IA to take is to investigate the unlicensed activity and potentially impose sanctions as prescribed by the Ordinance.

This question tests the understanding of the principle of indemnity in insurance, specifically its application to life insurance. Indemnity aims to restore the insured to the financial position they were in before the loss, without allowing for profit. Life insurance, however, pays a predetermined sum upon the occurrence of a specific event (death), regardless of the precise financial loss incurred by the beneficiaries. This is because the value of a human life is considered immeasurable in financial terms, and the purpose is to provide a specific benefit rather than to compensate for a quantifiable loss. Therefore, life insurance contracts are generally considered benefit policies, not indemnity policies, making statement (iii) and (iv) accurate.

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 PAR policies compared to non-participating (NON-PAR) policies, which do not offer this benefit. The question tests the understanding of the fundamental difference in premium pricing between these two types of policies, directly relating to the concept of policy dividends and their impact on premium rates as outlined in the syllabus.

The core difference between life insurance and annuities lies in their fundamental purpose and the underlying actuarial principles. Life insurance is designed to provide a payout upon the insured’s death, thus it is based on the probability of mortality. Premiums are structured to increase with age because the risk of death increases with age. Conversely, annuities are designed to provide a stream of income during a person’s lifetime, particularly during retirement. Therefore, they are based on the probability of longevity (living longer). The benefit payments increase with age at commencement because the insurer is paying out for a potentially longer period, and to compensate for the time value of money and the increasing likelihood of the annuitant living to receive payments. Men typically receive higher annuity payments than women of the same age because, on average, women have a longer life expectancy, meaning the annuity payout period for women is statistically longer, thus reducing the per-payment amount.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments chosen by the policyholder. This means that the policy’s value will fluctuate in line with the market value of these investments. Therefore, if the investments perform poorly, the policy value will decrease, and if they perform well, the policy value will increase. The question tests the understanding of this fundamental characteristic of unit-linked products, distinguishing them from traditional insurance policies where the insurer bears the investment risk.

The scenario highlights the principle of utmost good faith, which requires applicants to disclose all material facts. While a medical examination was provided, it did not negate the applicant’s ongoing duty to disclose pre-existing conditions. The insurer’s decision to rescind the policy was based on the discovery of a pre-existing condition (tachycardia, ectopic heartbeat, ischemic change) that was not fully revealed, even though the policy was accepted at an increased premium. This demonstrates that the medical examination, as conducted, was not sufficient to uncover all material facts, and the applicant’s failure to proactively disclose these past issues constituted a breach of their duty of disclosure under insurance law, allowing the insurer to void the contract from its inception.