Paper 3 Long Term Insurance Quiz 47

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

The scenario describes a situation where an insurance intermediary is providing a temporary insurance cover before the formal policy is issued. The key aspect here is the nature of this temporary cover. According to the provided text, in non-life insurance, a similar document to a cover note provides temporary, unconditional, but cancellable cover. The question asks about the characteristics of such a temporary cover in the context of the Hong Kong insurance market, specifically referencing the “Cover Note” as a parallel to the temporary cover discussed for life insurance. The provided text states that a Cover Note is usually for 30 days and may or may not be conditional upon premium payment. Therefore, the cover is not necessarily conditional upon the applicant being insurable, it is temporary, and it is cancellable. Option (a) correctly identifies that the cover is not conditional upon the applicant subsequently proving to be insurable, which aligns with the description of temporary, unconditional cover. Option (b) is incorrect because while it is temporary, the primary characteristic being tested is its non-conditional nature regarding insurability. Option (c) is incorrect as the text specifies a maximum duration (e.g., 60 or 90 days) and termination conditions, not that it’s always for the full period. Option (d) is incorrect because the text mentions that the cover may terminate earlier than the final day, but the core principle being tested is the non-conditional aspect of the initial cover.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual might be tempted to conduct insurance business without proper authorization, which is a violation of the law. Understanding the IA’s role and the necessity of obtaining a license before engaging in such activities is crucial for compliance. The other options represent incorrect regulatory bodies or misinterpretations of the licensing process.

This question assesses the understanding of the ‘Initiative on Financial Needs Analysis’ as outlined in Appendix F of the IIQE syllabus. The core principle of this initiative is to ensure that financial advice provided to clients is tailored to their specific financial situation, needs, and objectives. This involves a thorough assessment of their income, expenses, assets, liabilities, risk tolerance, and future financial goals. Option A correctly captures this by emphasizing a comprehensive evaluation of the client’s financial landscape and future aspirations. Option B is too narrow, focusing only on current income and expenses without considering assets, liabilities, or future goals. Option C is also incomplete as it overlooks the crucial aspect of future financial objectives and risk assessment. Option D is incorrect because while affordability is a factor, it’s only one component of a holistic financial needs analysis; it doesn’t encompass the full scope of the initiative.

The level premium system, as described, involves charging a premium that remains constant throughout the policy’s term. In the early years, this premium is higher than the actual cost of insurance for that specific year. This excess premium, along with the interest earned on it, accumulates to form a reserve. This reserve is then used to offset the shortfall in premiums during the later years of the policy when the cost of insurance naturally increases with age. This mechanism allows for a stable, predictable premium for the policyholder over the long term, a significant improvement over the natural premium system which would see premiums escalate annually.

This question tests the understanding of the ‘Cooling-off Period’ as stipulated by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their life insurance purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Therefore, if a policyholder receives the policy documents on March 1st and a separate notice on March 5th, the Cooling-off Period begins on March 1st.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential to receive dividends means that the insurer typically charges a higher premium for these policies compared to non-participating (NON-PAR) policies, which do not offer this profit-sharing feature. The higher premium for PAR policies accounts for the possibility of future dividend payments to the policyholder, making them inherently more expensive upfront. Term insurance, on the other hand, is generally not structured as a participating product because its primary function is to provide coverage for a specific period without accumulating cash value or offering profit-sharing mechanisms.

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 typically for outstanding policy loans, accrued interest on those loans, and any advance premium payments. Paid-up additions, which are small amounts of additional insurance purchased with dividends, are generally added to the cash value and do not reduce it. Therefore, the Net Cash Value is the cash value minus loans and interest, and minus advance premiums.

This question tests the understanding of how a conditional premium receipt functions in life insurance applications. A conditional receipt signifies that coverage begins from the application date, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but on different terms (e.g., higher premium, reduced coverage), the contract doesn’t commence until these revised terms are accepted. If the applicant becomes uninsurable or dies after applying but before a policy is issued, they are still covered if they were insurable at the application date. The key is the insurability at the time of application, not the issuance of the final policy.

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. Failure to obtain the required license constitutes a breach of the relevant legislation, leading to potential penalties. The other options represent incorrect regulatory bodies or incorrect licensing prerequisites.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the contract must be made in writing and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, it’s not the sole condition; the change must also be formally incorporated into the contract. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but it’s not sufficient on its own without formal endorsement. Option (d) is incorrect as the authority of senior officials does not override the contractual requirement for written agreement and endorsement.

The scenario describes an applicant whose medical assessment indicates a higher risk than standard. The insurer has several options to manage this substandard risk. Loading the premium is a common method where the cost of insurance is increased to reflect the elevated risk. Declining coverage is a last resort. A ‘debt on the policy’ or lien reduces the payout but is typically used for temporary or decreasing risks. Specific exclusions are rare and often defeat the purpose of insurance. Therefore, increasing the premium is the most standard and appropriate underwriting reaction to a substandard risk that is not severe enough to warrant declinature or a specific lien.

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 related to financial regulation but are not the primary licensing authority for insurance intermediaries in Hong Kong.

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.

This question tests the understanding of the core features of convertible term insurance as outlined in the IIQE syllabus. The key benefit of convertible term insurance is the policyholder’s right to switch to a permanent life insurance policy without needing to provide new evidence of insurability. This conversion privilege is a significant advantage, especially if the insured’s health deteriorates. The premium for the new permanent policy would be based on the insured’s age at the time of conversion, reflecting the increased risk associated with an older individual. While limitations on conversion (like age or policy duration caps) are common to mitigate anti-selection, the fundamental purpose remains the flexibility to secure permanent coverage later.

The question tests the understanding of the conditions under which a critical illness benefit can be paid. According to the provided text, a critical illness 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 benefit. Option B is incorrect because while a terminal illness is a trigger, the 12-month life expectancy is a specific condition, not the sole criterion. Option C is incorrect as the need for a specified medical procedure is a separate trigger, not directly linked to the severity of a diagnosed disease. Option D is incorrect because the text does not mention a requirement for the illness to be life-threatening in all cases; terminal illness is a specific category.

A mutual insurance company is legally owned by its participating policyholders, meaning they have a claim on the company’s profits and assets. This structure contrasts with proprietary companies, which are owned by shareholders. While the presence of ‘Mutual’ in a company’s name might suggest this structure, it’s not definitive proof, as some companies have transitioned from mutual to proprietary status. The core characteristic of a mutual company is its ownership by policyholders, not shareholders.

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 performance, charges, and potential outcomes under various scenarios. The document serves as a vital tool for ensuring transparency and consumer protection in the sale of ILPs, aligning with the regulatory framework governing financial advisory services and product disclosure in Hong Kong.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the cash value. These deductions are specifically outlined in the policy and typically include outstanding policy loans and any accrued interest on those loans, as well as adjustments for items like paid-up additions or advance premium payments. The question asks what is subtracted from the cash value to arrive at the Net Cash Value. Option A correctly identifies these common deductions. Option B is incorrect because dividends are typically used to purchase paid-up additions or reduce premiums, not subtracted from the cash value to determine the net amount. Option C is incorrect as the surrender value is the amount paid out upon policy cancellation, which is derived from the net cash value, not a deduction from it. Option D is incorrect because the pure premium is the cost of death claims without expenses, and it is not directly related to the calculation of net cash value.

The level premium system, as described, involves charging a premium that remains constant throughout the policy’s term. In the early years, this premium is higher than the actual cost of insurance for that year. This excess premium, along with the interest earned on it, accumulates to form a reserve. This reserve is then used to offset the shortfall in premiums during the later years of the policy, when the cost of insurance naturally increases with age. This mechanism allows for a stable, predictable premium for the policyholder while ensuring the insurer can meet its long-term obligations. The natural premium system, in contrast, charges premiums that increase annually with the insured’s age, reflecting the rising mortality risk, which makes it less attractive for long-term 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 supervision of insurance agents and brokers. The question highlights a scenario where an individual is soliciting insurance business without the necessary authorization, which is a contravention of the Ordinance. The correct response identifies the primary regulatory body responsible for enforcing these licensing requirements. Option B is incorrect as the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets. Option D is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between full and partial benefits. The provided text states that a sum equal to the accidental death benefit is usually payable for the loss of two limbs or total blindness, while a stated proportion of the accidental death benefit is paid for the loss of one limb, sight in one eye, or other specified lesser injuries. Therefore, losing one limb would trigger a lower benefit than losing two limbs or total sight.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual acting as an intermediary to solicit or arrange insurance business must be licensed by the IA. The question presents a scenario where an individual is facilitating insurance transactions without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent entities or activities that are either not directly related to the licensing of individual intermediaries or describe different regulatory functions.

This question tests the understanding of the ‘extended term insurance’ non-forfeiture option. When a policyholder 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, and the term of this new policy is determined by how long the net cash value can sustain the premium payments for that death benefit. This contrasts with other options like reduced paid-up insurance, where the cash value buys a policy of the same duration but with a reduced death benefit, or a cash surrender, which simply returns the cash value.

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 also specifies that only authorized senior officials of the insurance company can alter the contract, and any such changes must be in writing and agreed upon by the policyowner. Option (b) is incorrect because it describes the incontestability provision, not the entire contract provision. Option (c) is incorrect as it focuses on the process of contract modification rather than the definition of the contract’s components. Option (d) is incorrect because it highlights the long-term nature of the contract, which is a characteristic but not the definition of the entire contract provision itself.

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.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Failing to obtain the necessary license constitutes a breach of the regulatory requirements, leading to potential penalties and legal consequences. The other options represent incorrect interpretations of the regulatory landscape; for instance, while professional bodies may offer certifications, they do not replace the statutory licensing requirement by the IA. Similarly, the Hong Kong Federation of Insurers is an industry association, not a licensing authority, and the Companies Registry deals with company registration, not the licensing of insurance intermediaries.

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 as limited liability is a feature of corporate structures, but it doesn’t define the ownership of a mutual company.

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 should be based on a set of assumed rates, including 0%, 3%, 6%, and 9% (Version 1) or 0%, 3%, and 6% (Version 2). The key point is that rates other than 0% are maximum rates, and insurers have the discretion to illustrate lower rates. Option A correctly states that insurers can choose to illustrate lower rates than the specified maximums (excluding the 0% rate). Option B is incorrect because while the 0% rate is mandatory, it doesn’t imply that other rates must be illustrated at their maximum. Option C is incorrect as the illustration must include all policy-level charges, not just fund management charges. Option D is incorrect because the illustration must be provided before the policyholder signs the application form, not after the policy is issued.

The provided text specifies that the IFS-MP (Important Fact Statement – Mainland Policyholder) is mandatory for all new applications for long-term individual insurance policies under Classes A through F, when the customer is a holder of a PRC Resident Identity Card. Crucially, these customers cannot opt out of this requirement. The regulation also extends to changes in policy ownership or assignment where the new policyholder or assignee holds a PRC Resident Identity Card, necessitating a new IFS-MP for them. Therefore, the IFS-MP is a compulsory requirement for PRC identity card holders applying for new long-term individual insurance policies, and also for new policyholders in cases of ownership transfer.