Paper 3 Long Term Insurance Quiz 60

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, and future financial goals. Option A correctly identifies this comprehensive approach. Option B is incorrect because while understanding risk tolerance is crucial, it’s only one component of a full financial needs analysis, not the sole determinant. Option C is incorrect as focusing solely on investment products without considering the client’s overall financial picture would be a misapplication of the initiative. Option D is incorrect because while regulatory compliance is important, the initiative’s primary focus is on client-centric advice derived from a detailed needs analysis, not just adherence to broad regulatory frameworks.

The question tests the understanding of the ‘dismemberment’ benefit under an accident rider, specifically how it applies to the loss of sight. According to the provided text, dismemberment in the context of an Accident and Dismemberment (AD&D) rider typically covers not only the physical loss of limbs but also the loss of sight in both eyes. The benefit structure often includes a payment equal to the accidental death benefit for the loss of two limbs or the sight in both eyes. Lower benefits are usually provided for the loss of one limb or the sight in one eye. Therefore, the loss of sight in both eyes is a covered event under the dismemberment provision.

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 essence by emphasizing a comprehensive evaluation of the client’s financial landscape to determine suitable product recommendations. Option B is too narrow, focusing only on investment products. Option C is incorrect because while affordability is a factor, it’s not the sole determinant of suitability. Option D is also incorrect as it focuses on a single aspect (risk tolerance) rather than the holistic financial picture.

This question tests the understanding of the core difference between renewable term insurance and convertible term insurance, specifically focusing on the conditions under which the policy can be extended or changed. Renewable term insurance allows the policyholder to extend the coverage for another term without proving insurability, but at an increased premium based on the attained age. Convertible term insurance, on the other hand, grants the policyholder the right to switch the existing term policy into a permanent life insurance plan, also without a medical examination, but again, with premiums calculated based on the attained age for the new plan. Option (a) correctly identifies the ability to renew without evidence of insurability as the defining characteristic of renewable term insurance. Option (b) describes a feature of convertible term insurance. Option (c) is incorrect because while premiums increase with age in renewable term insurance, the primary feature is the renewal right itself. Option (d) is incorrect as it describes a benefit of endowment insurance, not term insurance.

The principle of utmost good faith in insurance requires applicants to disclose all material facts that could influence an insurer’s decision. In Case 2, the applicant’s obstructive sleep apnoea, despite not being directly related to the colon cancer, was deemed material by the insurer’s underwriting manual as it could affect decisions on critical illness and waiver of premium benefits. The Complaints Panel upheld the insurer’s decision because the non-disclosure of this condition would have prompted the insurer to seek further information or conduct additional medical examinations before accepting the risk. This aligns with the legal requirement for applicants to actively disclose material facts they know or should know, irrespective of whether the undisclosed fact directly caused the eventual claim. The key is the potential impact on the underwriting process.

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

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.

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.

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

A joint-life policy is designed to cover two or more individuals. The critical aspect is when the payout occurs. A ‘first-to-die’ policy pays out upon the death of the first insured person, while a ‘last-to-die’ policy pays out only after all insured individuals have passed away. The question describes a policy that pays out on the first death, making it a ‘first-to-die’ joint-life policy. The other options describe different types of insurance or policy features: Key Person insurance protects a business from the financial loss due to the death of a crucial employee, Level Term insurance provides a fixed death benefit for a specified period, and a Level Premium System refers to how premiums are structured over the policy’s life, not the payout trigger.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments. Premiums paid are used to purchase units in a fund, and the policy’s value fluctuates based on the unit price. This means the policyholder bears the investment risk. The question tests the understanding of how the value of a unit-linked policy is determined and the inherent risk associated with it, distinguishing it from traditional insurance products where the insurer bears more of the investment risk.

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). This statutory provision extends the concept of insurable interest beyond immediate blood relations like spouses, parents, children, grandparents, and grandchildren, which are generally recognized in other jurisdictions. Therefore, a policy taken out by a parent on the life of their minor child is legally valid due to this specific legislative provision.

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 details about a rider, which deviates from the standard requirement of focusing solely on the basic plan. Therefore, this would be considered a departure from the prescribed format.

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, encompassing acquisition costs, administrative overhead, and commissions, are also factored in to ensure profitability and sustainability. Morbidity, on the other hand, relates to the incidence of sickness or disability, which is primarily a concern for health and disability insurance, not the core calculation of life insurance premiums.

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 pays benefits for a predetermined number of years, aligning perfectly 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.

This question tests the understanding of ‘Reversionary Interest’ as defined in the context of with-profits policies. A reversionary bonus is a type of bonus that is added to the sum assured of a policy, and it vests or becomes a guaranteed part of the policy value at a future point or upon a specific event, such as the policyholder reaching a certain age or the policy maturing. This aligns with the definition of a financial interest that exists now but whose full enjoyment is deferred. Option B describes a rider, which modifies benefits. Option C refers to settlement options, which are choices for payout. Option D describes subrogation, a principle not applicable to life insurance.

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 scenario highlights a situation where an individual is acting as an intermediary without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing of insurance agents and brokers. Engaging in insurance intermediary activities without a valid license is a contravention of the relevant legislation, leading to potential penalties. Option A correctly identifies the IA as the regulatory body and the need for a license to conduct such activities. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly oversee insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because while the Financial Services and the Treasury Bureau sets policy, the IA is the operational regulator responsible for licensing and supervision.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. Failure to obtain a license before commencing such activities constitutes a breach of the law and can lead to penalties. Therefore, a person intending to solicit insurance business must first secure the appropriate license from the IA.

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 is less attractive for long-term planning.

The question tests the understanding of the Policyowner Service (POS) department’s responsibilities, specifically regarding policy changes. While POS handles various administrative tasks, the underwriting consideration for changes in the amount of cover is a critical step that requires assessment of risk. Therefore, while POS facilitates the process, the actual decision on increasing cover often involves underwriting, making it a key consideration beyond simple administrative updates.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential for profit sharing means that the premiums charged for PAR policies are typically higher than those for non-participating (NON-PAR) policies, which do not offer such a benefit. The higher premium for PAR policies accounts for the possibility of future dividend payments to the policyholder, making them more expensive upfront but potentially more valuable over the long term if the insurer performs well.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured of the obligation to pay premiums during a period of total disability. This rider ensures that the policy remains in force, continuing to build cash value or pay dividends as if premiums were still being paid. The core purpose is to maintain the policy’s benefits without the financial burden of premium payments when the insured is unable to work. Therefore, the most accurate description of the rider’s function is to ensure the policy remains active and continues to accrue benefits without premium payments during the period of disability.

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 duration. 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 number of years, irrespective of the beneficiary’s lifespan. The other options represent different methods of receiving the proceeds: 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.

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. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because the Office of the Privacy Commissioner for Personal Data (PCPD) focuses on data privacy, which is a separate regulatory concern from the licensing of insurance professionals.

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, more than two years after the policy came into force), 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 acted as a shield against the insurer’s claim of material non-disclosure. The question tests the understanding of how the incontestability provision overrides other grounds for repudiation, such as breach of utmost good faith, in the absence of proven fraud.

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.

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 financial goals they aim to achieve. The note also stresses the need for clear and transparent communication regarding product features, benefits, risks, and costs. Therefore, a recommendation that prioritizes the client’s best interests and is supported by a thorough needs analysis is considered compliant.

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 a higher 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 or lien, which is a method to manage temporary increases in mortality risk. Option (b) describes loading the premium, which is a different approach. Option (c) describes specific exclusions, which is less common and usually defeats the purpose of insurance. Option (d) describes declining to accept at present, which is a deferral of a decision due to a temporary adverse condition, not a permanent underwriting action for an accepted substandard risk.

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, creating a surplus. This surplus, along with the interest earned on it, is used to build a reserve. In later years, when the cost of insurance naturally increases with age, this reserve helps to cover the difference between the actual cost and the fixed premium. This mechanism effectively averages the cost of insurance over the policy’s lifetime, making it attractive compared to the escalating costs of the natural premium system. The question tests the understanding of how the level premium system manages the cost of insurance over time by creating a reserve from early year surpluses.

An annuity is a contract where an insurer agrees to make a series of periodic payments to a designated individual (the payee) for a specified period or for the lifetime of another person (the annuitant). These payments are made in exchange for an initial lump sum or a series of payments (annuity considerations). The question describes a scenario where an insurer promises to provide regular payments to a person for their lifetime in return for an upfront payment. This aligns perfectly with the definition of an annuity. Option B describes a life insurance policy, which pays a death benefit upon the insured’s death, not periodic payments during their lifetime. Option C describes a savings plan, which typically involves accumulating funds for future use but doesn’t inherently involve guaranteed lifetime payments from an insurer. Option D describes a pension plan, which is a type of retirement plan, but the core definition of an annuity contract is what is being tested here, and an annuity is a specific type of financial product that can be used within a pension framework, but the question is about the contract itself.