Paper 3 Long Term Insurance Quiz 62

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically concerning the licensing and conduct requirements. The Insurance Ordinance (Cap. 41) and its subsidiary legislation, such as the Insurance (Registration of Brokers and Agents) Regulations, mandate that individuals and companies carrying out regulated activities must be licensed by the Insurance Authority (IA). The scenario describes an individual soliciting insurance business without holding the requisite license, which constitutes a breach of these regulations. Option A correctly identifies the primary regulatory body responsible for licensing and supervision. Option B is incorrect because while the IA is the primary regulator, the SFC regulates the securities and futures markets, not insurance intermediaries directly. Option C is incorrect as the IA’s role is regulatory and supervisory, not primarily enforcement of criminal law, although breaches can lead to penalties. Option D is incorrect because while professional bodies may have their own codes of conduct, the fundamental legal requirement for licensing stems from the IA’s authority under the Insurance Ordinance.

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 premiums charged for PAR policies are typically higher than those for 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 more expensive upfront compared to NON-PAR policies that do not have this feature.

Section 64A of the Insurance Ordinance (Cap. 41) in Hong Kong specifically grants an insurable interest to a parent or guardian in the life of a minor (a person under 18 years of age). While spouses generally have an insurable interest in each other’s lives, and close blood relatives like parents in their children and vice versa, the Ordinance explicitly extends this to parents/guardians insuring minors. The question asks about a statutory extension beyond typical familial relationships. Insuring a business partner’s life, even if there’s a financial dependency, does not automatically create an insurable interest under Hong Kong law unless it falls under specific indemnity-based insurance scenarios not detailed here, and certainly not as a statutory extension for general life insurance. Similarly, insuring a friend’s life, regardless of the depth of friendship or potential financial loss, does not confer an insurable interest under the Ordinance.

The question tests the understanding of the conditions under which a critical illness benefit is payable. According to the syllabus, a critical illness benefit can be paid if 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 specified life expectancy is crucial. Option C is incorrect as the syllabus does not mention a requirement for the insured to be unable to perform activities of daily living for critical illness benefits; this is characteristic of Long-Term Care benefits. Option D is incorrect because the syllabus does not state that the benefit is only payable if the insured requires ongoing medical treatment; the initial diagnosis is the primary trigger.

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 incurred by the beneficiary. Therefore, an individual can hold multiple life insurance policies, and each policy will pay out its full sum assured upon the occurrence of the insured event (death). This contrasts with general insurance (like property or motor insurance), where the principle of indemnity applies, and the insured cannot profit from a loss by claiming from multiple policies for the same loss. The concept of ‘contribution’ applies to general insurance, where multiple insurers share the loss proportionally, but not to life insurance.

The question tests the understanding of the role of the insurance intermediary or group representative in the initial stages of policy issuance. According to the provided text, the process of issuing a certificate and completing an enrolment card for each insured person is typically overseen by the insurance intermediary or group representative. This highlights their responsibility in ensuring the accurate and complete documentation of the policyholder’s details at the outset.

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. The question tests the candidate’s knowledge of which entity is empowered to grant licenses to individuals acting as insurance intermediaries. The Insurance Authority is the sole licensing body, ensuring that intermediaries meet the necessary competency, integrity, and financial soundness standards to protect policyholders. The other options represent entities that are either part of the government but not directly responsible for insurance intermediary licensing (e.g., Securities and Futures Commission), a professional body with a role in self-regulation but not statutory licensing (e.g., The Confederation of Insurance Brokers), or a general business registration authority (e.g., Companies Registry).

The SFC’s Illustration Document for Investment-Linked Policies (Version 2) mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the potential variability of returns and the underlying assumptions used in projecting future values. Option B is incorrect because while projections are important, the primary focus is on the distinction between guaranteed and non-guaranteed elements. Option C is incorrect as the document emphasizes the projection of values, not the historical performance of underlying assets. Option D is incorrect because while transparency is key, the specific requirement is about differentiating guaranteed versus non-guaranteed components, not just providing a general disclaimer.

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 substitute for the statutory licensing requirement mandated by 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 age, which becomes prohibitively expensive for older policyholders, leading to adverse selection.

The question tests the understanding of the ‘adequate’ and ‘equitable’ principles in life insurance premium calculation. An adequate premium ensures the insurer has sufficient funds to meet its obligations, including paying benefits and covering operational costs. An equitable premium means that each policyholder pays an amount proportionate to the risk they represent and the benefits they are entitled to. The scenario describes a situation where premiums are insufficient to cover claims and expenses, directly violating the ‘adequate’ principle. While equity is also important, the primary failure highlighted is the lack of adequacy, which is the foundational requirement for solvency and the ability to meet future claims.

The question tests the understanding of ‘Reversionary Bonus’ which is a type of financial interest where the full enjoyment of ownership is deferred to a future time or event. This aligns with the definition of a reversionary interest. Option B describes a ‘Rider’, which is an amendment to a policy. Option C refers to ‘Settlement Options’, which are choices for payout of policy proceeds. Option D describes ‘Subrogation’, a principle that does not apply to life insurance.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this effect. A Cost of Living Adjustment (COLA) rider is a provision that allows for periodic increases in benefits, such as disability income, to keep pace with inflation. These increases are typically tied to an independent index, like the Composite Consumer Price Index, ensuring that the real value of the benefit is maintained over time. The other options describe different aspects of insurance or riders that do not directly address the erosion of purchasing power due to inflation in the context of ongoing benefit payments.

This scenario describes an applicant who has disclosed a history of a serious medical condition that requires further investigation by the insurer. According to underwriting principles, when an applicant’s health history suggests a higher likelihood of claims than a standard risk, they are typically classified as a sub-standard risk. This classification allows the insurer to offer coverage but may involve adjustments such as higher premiums or specific policy exclusions to account for the increased mortality risk. Standard risks are those with no abnormal features, declined risks are those deemed uninsurable by the company, and preferred risks are those with an above-average health profile.

When a selling office identifies potential twisting, it has a duty to investigate. If twisting is confirmed, the selling office must take several immediate actions. These include reporting the agent to the relevant registration body, suspending the agent from selling new life insurance, and clawing back commissions. Crucially, the selling office must also inform the client that they may have been sold a policy unprofessionally, offering them the option to cancel the new policy and reinstate the old one within 30 days. The client must also be informed of the agent’s suspension and their inability to sell further new life insurance.

A joint-life policy is designed to cover two or more individuals. The critical aspect is when the payout occurs. A policy that pays out ‘on the first death’ is known as a ‘first-to-die’ policy, while one that pays out ‘on the last death’ is a ‘last-to-die’ policy. The question specifies that the policy 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 Life 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 Mortgage Redemption Insurance is a specific type of decreasing term insurance linked to a mortgage, often on a joint-life basis but specifically designed to cover the outstanding loan balance.

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 before conducting insurance intermediary activities is crucial for compliance. The other options represent incorrect interpretations of regulatory responsibilities or licensing procedures.

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, and risks. 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 such products in Hong Kong.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) governs the licensing and operations of insurance companies in Hong Kong. Specifically, it focuses on the requirement for an insurer to be authorized by the Insurance Authority (IA) before conducting any insurance business. The scenario describes an entity that is not authorized, highlighting a direct contravention of the ordinance. Option B is incorrect because while intermediaries are regulated, the primary issue here is the unauthorized insurer itself. Option C is incorrect as the Mandatory Provident Fund Schemes Ordinance deals with retirement savings, not general insurance business authorization. Option D is incorrect because the Securities and Futures Ordinance governs regulated activities in the securities and futures markets, not the core business of insurance.

The scenario highlights a situation where a policyholder is seeking a refund outside the stipulated cooling-off period. According to the provided guidelines, insurance intermediaries (LIMs) are advised to maintain records of complaints or disputes where clients are refused refunds outside the cooling-off period. These records are to be provided to the Hong Kong Federation of Insurers (HKFI) upon request. Therefore, the intermediary’s primary responsibility in this specific situation, as per the advice given, is to ensure these records are maintained and available for potential submission to the HKFI.

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 intermediaries. The question highlights a scenario where an individual is providing advice on insurance products without holding the necessary license. This directly contravenes the provisions of the Ordinance, which mandates that any person who solicits, negotiates, or effects insurance business must be licensed by the IA. The other options represent incorrect interpretations of regulatory responsibilities or licensing categories. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, the licensing of insurance intermediaries falls under the IA. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediary activities. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, and while some insurance products may have investment components, the primary licensing for insurance advice rests with the IA.

A Family Income Insurance policy is a type of decreasing term insurance designed to provide a regular monthly income to beneficiaries for a specified period after the insured’s death. This income stream is intended to replace the deceased’s income, helping the family maintain their standard of living. The benefit is paid for the remainder of a predetermined term, making it a form of income replacement rather than a lump sum payout. Options B, C, and D describe different types of insurance or policy features that do not align with the core function of Family Income Insurance.

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.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Option (a) correctly states that if the insured dies during the grace period before the premium is paid, the outstanding premium will be deducted from the death benefit. This is a crucial aspect of how grace periods function, ensuring the insurer is not liable for the full sum assured without receiving the due premium. Option (b) is incorrect because while the initial premium payment is critical for policy commencement, the grace period rules regarding premium deduction upon death during that period apply to subsequent premiums. Option (c) is incorrect as payment within the grace period is considered timely for the purpose of keeping the policy in force, but it doesn’t negate the fact that the premium was technically overdue. Option (d) is incorrect because the scenario described in the question is precisely an example of how the grace period operates, and it is not a period of free insurance; the insurer has a right to deduct the unpaid premium.

This question tests the understanding of how premiums are handled in a life insurance policy that has an age-related limitation on premium payments. The scenario describes a policy where premiums cease at a specific age, say 65. If the policyholder dies before reaching this age, premiums are only payable up to the date of death. This means that if death occurs at age 60, the premiums paid would cover the period from policy inception until age 60. If the policyholder survives past age 65, no further premiums are due, regardless of how long they live. Therefore, the total premiums paid would be for the period from policy inception until the age of 65.

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 contravention of the Ordinance. The correct answer emphasizes the need for a valid license issued by the IA to conduct insurance intermediary activities legally. The other options present incorrect scenarios: one suggests a general business registration is sufficient, another implies a license from a different regulatory body would suffice, and the third incorrectly states that no specific license is required if the activity is incidental to another business.

The Insurance Authority (IA) mandates the use of the Investor Protection Information Statement – Mainland Policyholder (IFS-MP) for all new applications of long-term insurance policies for individual customers who are holders of a PRC Resident Identity Card, across all distribution channels and policy classes. This requirement is non-negotiable, meaning customers cannot opt out. The regulation also specifies that if the ownership of an existing policy changes or is assigned to a new policyholder who is a PRC Resident Identity Card holder, the IFS-MP must be completed by the new policyholder. This ensures that all PRC residents purchasing long-term insurance in Hong Kong receive the necessary information and disclosures, regardless of the policy’s class or the distribution method.

This question tests the understanding of disclosure requirements for insurance policies sold to Mainland China residents. The Insurance Authority (IA) mandates specific disclosures to ensure policyholders are fully informed. The ‘Important Facts Statement for Mainland Policyholder’ is a crucial document that must be provided in Chinese, as stipulated by regulatory guidelines, to ensure clarity and compliance with local language requirements for this specific customer segment. Providing it in English would not meet the regulatory expectation for effective communication and understanding.

The question tests the understanding of the process of policy changes and the associated responsibilities. When a policyholder requests a change, such as altering the sum assured, the insurer must conduct a thorough review. This review typically involves underwriting to assess the new risk profile associated with the increased coverage. Failure to perform adequate underwriting could lead to adverse selection and financial losses for the insurer. Therefore, the insurer’s responsibility is to ensure that all policy changes, especially those impacting the sum assured, are subject to appropriate underwriting scrutiny to maintain the integrity of the contract and the insurer’s financial stability. Options B, C, and D describe administrative tasks or less critical changes that do not inherently require the same level of risk assessment as a change in the sum assured.

The question tests the understanding of the specific disclosure requirements for recommending a single premium policy under the IIQE syllabus. According to the guidelines, when recommending a single premium policy, a CIB Member must include details about the premium/liquid asset ratio, the lock-up period, and any interest rate risk and downside implications if premium financing, leverage, or gearing is involved. Option A correctly lists these required disclosures. Option B is incorrect because it includes the ratio of regular premiums to disposable income, which is a requirement for regular premium policies, not single premium policies. Option C is incorrect as it mentions the premium payment term extending beyond retirement age, which is also specific to regular premium policies. Option D is incorrect because it omits the crucial disclosure of interest rate risk and downside implications when financing is involved, and incorrectly includes the disposable income ratio.