Paper 3 Long Term Insurance Quiz 65

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

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 necessary license can result in penalties. The question highlights a common scenario where an individual might be tempted to engage in insurance sales without proper authorization, emphasizing the importance of adhering to regulatory requirements.

The question tests the understanding of the conditions under which a critical illness benefit can be paid. According to the syllabus, 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 lists these three conditions. Option B is incorrect because while a terminal illness with a 12-month life expectancy is a trigger, the general definition of a terminal illness without the life expectancy qualifier is not sufficient. Option C is incorrect as the benefit is not solely tied to requiring a specified medical procedure; diagnosis of a specified disease is also a trigger. Option D is incorrect because while a waiting period might apply, the diagnosis of a terminal illness alone, without the specified life expectancy, is not a guaranteed trigger for payment.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) outlines the principles and practices expected of insurers when assessing and accepting long-term insurance risks. A key aspect of this guideline is the emphasis on ensuring that underwriting decisions are based on sound actuarial principles and a thorough assessment of the risk presented by the applicant. This includes considering factors that could materially affect the mortality or morbidity experience of the insured pool. While the guideline promotes fair treatment of customers, its primary focus in underwriting is risk selection and pricing to maintain the financial stability and solvency of the insurer. Therefore, the most appropriate objective from the given options, aligning with the core purpose of underwriting as detailed in GL16, is to ensure that the premium charged adequately reflects the risk undertaken by the insurer.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. While affordability (option D) is a practical consideration, the core inquiry for an insurance intermediary is to ascertain the client’s objectives and needs that the insurance policy is intended to fulfill. Understanding what the client wants the insurance to *do* (e.g., provide income replacement, cover final expenses, fund education) is paramount to recommending the most suitable product and coverage amount. Options B and C are less relevant to the initial needs assessment; commission is an agent’s concern, and questioning the need directly can be perceived as dismissive before understanding the purpose.

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 its cash value, nor is it converted to paid-up insurance with a reduced death benefit. The question specifically asks about the outcome when the cash value is used to buy term insurance for the original face amount for as long as the cash value permits, which directly describes the extended term insurance option.

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 on the death of the first person insured, which aligns with the definition of a ‘first-to-die’ joint-life policy. The other options describe different types of insurance or policy features that do not fit the scenario.

The question tests the understanding of the after-sales service responsibilities of a Policyowner Service (POS) department. Specifically, it focuses on the administrative tasks related to policy changes. Option (a) correctly identifies the handling of policy changes as a key duty. Option (b) is incorrect because while documentation is a POS duty, it’s too broad and doesn’t specifically address the *changes* aspect. Option (c) is incorrect as premium payments are a separate function, not directly related to policy modifications. Option (d) is incorrect because benefit administration, such as cash values and policy loans, is distinct from processing changes to the policy’s core terms or details.

A Conditional Premium Receipt provides temporary insurance coverage from the application date, contingent upon the applicant being found insurable on standard terms at the time of application. This means that if the applicant is later deemed uninsurable or requires a higher premium due to their health status at the time of application, the coverage provided by the receipt may not be valid or may be adjusted. The question tests the understanding of the conditional nature of this receipt and the specific criteria for its validity, which is the applicant’s insurability on standard terms at the application date.

A collateral assignment is a temporary arrangement where a life insurance policy is pledged as security for a loan. The assignee’s rights are limited to the loan amount plus interest. Upon full repayment of the loan, the assignor regains all rights to the policy. Crucially, during a collateral assignment, the policy owner (assignor) cannot exercise certain policy rights, such as taking a policy loan or surrendering the policy, as these actions would diminish the security provided to the assignee.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, 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 can lead to penalties. The question is designed to assess whether the candidate understands the fundamental requirement for an individual to be authorized by the relevant regulatory body before engaging in insurance intermediary activities.

The principle of utmost good faith in insurance requires applicants to disclose all material facts that could influence an insurer’s decision to accept the risk or determine the premium. In this scenario, the applicant’s history of obstructive sleep apnoea, even if seemingly unrelated to the later diagnosed colon cancer, was deemed material by the insurer. The underwriting manual indicated that the severity of sleep apnoea and associated conditions could affect underwriting decisions for critical illness and waiver of premium benefits. The Complaints Panel upheld the insurer’s decision because the non-disclosed condition was significant enough to have potentially altered the insurer’s underwriting assessment, regardless of the eventual cause of claim. The argument that the condition was unrelated to the claim is irrelevant when assessing a breach of utmost good faith concerning underwriting decisions.

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 describes an individual acting as a broker without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for licensing and regulating insurance intermediaries. Operating as an insurance broker without a valid license issued by the IA is a contravention of the relevant provisions, leading to potential penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in the industry, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance brokerage. Option D is incorrect because the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries.

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 lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding the necessary license. This action constitutes a breach of the regulatory requirements, as referral activities that lead to the solicitation or transaction of insurance business are considered regulated activities requiring a license. Therefore, the individual is acting unlawfully and is subject to disciplinary action by the IA.

The CIB (Confederation of Insurance Brokers) mandates that its members conduct a thorough needs analysis for clients seeking long-term insurance. This analysis must encompass understanding the client’s existing financial commitments, income sources, and overall financial priorities. Crucially, it requires obtaining details about any current long-term insurance policies the client holds, regardless of their status (in force, paid-up, suspended, or under premium holiday). This comprehensive understanding allows the CIB member to accurately assess the client’s capacity to commit to new or additional long-term insurance and recommend suitable products that align with their identified needs and financial situation. Failing to inquire about existing policies would result in an incomplete needs analysis, potentially leading to inappropriate product recommendations and a breach of regulatory guidelines.

Family Income Insurance is a type of decreasing term insurance. Its primary function is to provide a regular monthly income to beneficiaries for a specified period after the insured’s death, rather than a lump sum. This structure is designed to replace the insured’s income for a defined duration, supporting dependents during a critical period. The benefit amount decreases over time, reflecting the diminishing need for income replacement as the specified period progresses. This contrasts with level term insurance, which maintains a constant death benefit, or whole life insurance, which builds cash value and provides lifelong 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. The relevant legislation mandates that any person who acts as an insurance agent or broker must be licensed by the IA. Failure to comply with this requirement can lead to penalties, including fines and imprisonment, as stipulated in the Ordinance. Therefore, the correct course of action for the individual is to cease all activities until a license is obtained, and for the public to report such unlicensed activities to the IA.

This question tests the understanding of the ‘cooling-off’ period for insurance contracts in Hong Kong, specifically concerning the right of policyholders to cancel their policies without penalty. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, such as the Insurance (Intermediaries) Regulations, govern such practices. The cooling-off period allows a policyholder to review the policy after receiving it and cancel it if they are not satisfied, typically receiving a refund of premiums paid, less any administrative charges or the cost of any cover already provided. Option A correctly identifies the purpose and typical outcome of exercising this right. Option B is incorrect because while policy terms are reviewed, the primary purpose is cancellation, not amendment. Option C is incorrect as the period is for cancellation, not for making additional premium payments. Option D is incorrect because while the insurer might deduct costs, the policyholder generally has the right to cancel within this period, not to have the policy automatically lapse.

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 economic indicator like the Consumer Price Index (CPI). Therefore, a rider that provides for periodic increases in disability income benefits, linked to a recognized index, is the correct answer.

A joint-life policy that pays on the first death is designed to provide a payout when the first of the insured individuals passes away. This is often used for situations like covering a mortgage where the loan needs to be repaid upon the death of either spouse. The term ‘joint-life basis’ refers to insuring multiple lives under a single policy. ‘Level Term Insurance’ refers to a policy where the death benefit remains constant throughout the term. ‘Key Person Life Insurance’ is specifically for businesses insuring a crucial employee, and ‘Mortgage Indemnity Insurance’ protects the lender against property value depreciation, not the borrower’s life.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. The assignee’s rights are limited to the loan amount plus interest. Upon full repayment of the loan, the assignor regains their full rights to the policy. Crucially, during a collateral assignment, the policy owner (assignor) cannot exercise certain policy rights, such as taking a policy loan or surrendering the policy, as these actions would diminish the security provided to the assignee.

The Customer Protection Declaration Form, as outlined by the Hong Kong Federation of Insurers (HKFI), serves as a crucial document to ensure transparency and informed consent. It requires the intermediary to declare that they have provided the customer with a clear and understandable explanation of the product’s key features, benefits, risks, and charges. This declaration is a fundamental aspect of the intermediary’s duty of care and adherence to regulatory expectations regarding customer protection, ensuring that clients make decisions based on a comprehensive understanding of the insurance product. The form is not intended to replace the Product Key Facts Statement (PKS) but rather to supplement it by confirming the intermediary’s role in explaining the product’s intricacies.

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. 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 incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and promotion, 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 confer the legal authority to act as an insurance intermediary; that authority stems solely from the IA’s license.

The ‘Initiative on Financial Needs Analysis’ mandates that an FNA form must accompany applications for new life insurance policies falling under Class C or Class A of the Insurance Ordinance, with specific exclusions. These exclusions include term insurance, refundable policies for specific health coverages, yearly renewable non-cash value policies for critical illness/medical cover, and group policies. Therefore, a policy that is a yearly renewable critical illness policy without cash value is explicitly exempted from the FNA requirement.

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 facilitate comprehension for this specific group of policyholders. Providing it in English would contravene the spirit and letter of these disclosure obligations, potentially leading to misinterpretations or a lack of understanding of policy terms and conditions.

The scenario describes a situation where a policyholder wishes to cancel a non-linked single premium life insurance policy after the cooling-off period has expired. According to the provided guidelines, for non-linked single premium policies, the insurer has the right to apply a Market Value Adjustment (MVA) to the refund of premiums. This MVA is intended to cover the insurer’s potential losses from realizing assets acquired through the investment of premiums. Crucially, the guidelines state that this right to apply an MVA must be disclosed to potential policyholders before they sign the application form, either through a letter or within the product brochure. Therefore, if this disclosure was made, the insurer is within their rights to apply an MVA, even if the cancellation occurs outside the cooling-off period.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s survival. This distinguishes it from other annuity types that are contingent on life expectancy. The question tests the understanding of this core feature of an Annuity Certain, differentiating it from annuities that might cease upon death or continue indefinitely.

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 in Hong Kong. Any person or entity conducting insurance intermediary business, whether as an agent or a broker, must be licensed by the IA. Operating without a license is a contravention of the relevant legislation, leading to potential penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) is a self-regulatory organization for insurers, it does not issue licenses to intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFSA) regulates MPF schemes, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries.

This question tests the understanding of how participating policies are illustrated, specifically focusing on the components that contribute to the projected value. The Hong Kong Federation of Insurers (HKFI) provides a standard illustration format for participating policies. This illustration typically includes guaranteed benefits, non-guaranteed benefits (bonuses), and the projected cash value. The projected cash value is a crucial element as it reflects the potential future value of the policy, influenced by both guaranteed and non-guaranteed components. Therefore, the illustration should clearly delineate these elements to provide a transparent view of the policy’s potential performance. Option B is incorrect because while expenses are a factor in policy pricing, they are not the primary component illustrated as a positive addition to the policy’s value in the same way as bonuses. Option C is incorrect because surrender value is a specific benefit payable upon termination, not the ongoing projected value of a continuing policy. Option D is incorrect because the maturity benefit is paid at the end of the policy term, whereas the illustration aims to show the projected value throughout the policy’s life.

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 a non-renewable term policy. While the face amount might be restricted in some policies, the core feature is the right to renew at an increased, age-adjusted premium.