Paper 3 Long Term Insurance Quiz 66

The core principle differentiating life insurance and annuities lies in their fundamental risk assumptions. Life insurance is designed to provide a payout upon the occurrence of an event (death), meaning the insurer benefits from a shorter lifespan of the insured. Conversely, annuities are structured to provide income for the annuitant’s lifetime, meaning the insurer benefits from the annuitant living longer. This directly impacts underwriting: life insurance premiums increase with age because the probability of death rises, and men, historically having shorter life expectancies, pay more. Annuities, however, pay out more per period as the annuitant ages because the total payout period is expected to be shorter, and men receive higher payments due to their shorter life expectancies, reflecting the insurer’s goal of managing longevity 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 years of age). While blood relationships like siblings or grandparents are generally recognized as establishing insurable interest in many jurisdictions, Hong Kong law, as stipulated in the provided text, limits this statutory extension to parents or guardians of minors. Therefore, a policy taken out by an aunt on her nephew’s life, without being his legal guardian, would not be considered to have a valid insurable interest under this specific provision, making the contract void from its inception.

This question assesses the understanding of the core principle behind the Financial Needs Analysis (FNA) initiative, which is to ensure that financial products are suitable for clients based on their individual circumstances and needs. The initiative emphasizes a client-centric approach, moving beyond a simple product-selling model to one that prioritizes client well-being and informed decision-making. Option B is incorrect because while regulatory compliance is important, it’s a consequence of proper FNA, not its primary objective. Option C is incorrect as the focus is on client needs, not solely on maximizing sales commissions, which could lead to misaligned recommendations. Option D is incorrect because while understanding market trends is beneficial, the fundamental driver of FNA is the client’s specific situation, not general market dynamics.

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. 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 voluntary certifications, they do not substitute for the mandatory IA license. Similarly, the Hong Kong Federation of Insurers is an industry association, not a licensing authority, and while compliance with the Code of Conduct is crucial, it is a post-licensing requirement.

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 presents a scenario where an individual is providing advice on insurance products without holding the necessary authorization. This directly contravenes the provisions of the Ordinance which mandate that any person who solicits or accepts 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 IA is the sole regulator for 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 professional bodies may have their own codes of conduct, they do not supersede the statutory licensing requirements imposed by the IA.

The level premium system, as described, allows for an unchanging annual premium throughout the policy’s duration. This is achieved by charging a premium in the early years that is higher than the immediate risk of death, and in later years, a premium that is lower than the actual risk. The ‘excess’ premiums from the early years, along with the interest earned on them, are accumulated to form a reserve. This reserve is then used to offset the shortfall in premiums during the later years when the risk of death is higher. This mechanism effectively ‘averages out’ the cost of insurance over the policy’s term, making the premium level. The natural premium system, in contrast, charges a premium that increases each year with the insured’s age, reflecting the rising mortality risk. This leads to higher premiums in later years, which can become prohibitively expensive, and also creates an adverse selection problem where healthier individuals may opt out.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding a license. This action constitutes a breach of the regulatory requirements, as only licensed individuals are permitted to engage in such activities. The other options are incorrect because while an insurance company must be authorized, the focus of the question is on the intermediary’s actions. Furthermore, while professional bodies may have their own codes of conduct, the primary legal requirement for soliciting insurance business is the IA license. The Hong Kong Federation of Insurers is an industry association, not a regulatory body for individual licensing.

Family Income Insurance is a type of decreasing term insurance designed to provide a regular income to beneficiaries for a specified period after the insured’s death. This income stream is intended to replace the deceased’s earnings, thus supporting the family’s financial needs during a critical period. The benefit is paid monthly, and the total payout depends on the duration of the income period and the monthly benefit amount. Unlike a level term policy that pays a lump sum, this product focuses on providing ongoing financial support.

The scenario describes a situation where an insurance agent recommends a new policy that significantly alters the terms of an existing policy. The key element is the reduction of the sum insured by more than 50% of the original basic coverage. According to the Insurance Code, a ‘replacement’ occurs if, within 12 months of a new policy being effected, an existing policy’s substantial part (defined as 50% or more) of the sum insured is lapsed, surrendered, or converted to reduced paid-up or extended-term insurance. In this case, the reduction of the sum insured by 60% clearly meets this definition. Therefore, the agent’s action constitutes a replacement, and the agent is obligated to follow the procedures for handling replacements, including the completion of the Customer Protection Declaration (CPD) form, to ensure the policyholder is fully informed of the implications.

This question tests the understanding of the ‘Cooling-off Period’ in Hong Kong life insurance, as introduced by the HKFI’s Code of Practice. The period is designed to protect consumers from potential high-pressure sales tactics. The key aspect is that the 21-day period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Options B, C, and D present incorrect starting points for this period, such as the application date, the premium payment date, or the policy issue date without considering the delivery or notice aspect, which are common misconceptions.

This question tests the understanding of the principle of indemnity in insurance contracts, specifically its application to life insurance. Indemnity aims to restore the insured to the financial position they were in before the loss occurred. In life insurance, the loss of a life is not quantifiable in monetary terms in the same way as property damage or liability. Therefore, life insurance policies are typically ‘benefit policies’ where a predetermined sum is paid upon the occurrence of the insured event (death), rather than being subject to the principle of indemnity. Statement (iii) correctly asserts that life insurance contracts are not normally subject to indemnity, and statement (iv) reinforces this by highlighting the prevalence of benefit policies in life insurance, where indemnity does not typically apply. Statements (i) and (ii) are incorrect because they suggest a similarity or partial application of indemnity to life policies, which is generally not the case.

The Standard Illustration for Participating Policies, as mandated by regulatory guidelines, requires insurers to provide a summary of major benefits for participating policies, excluding universal life insurance. A key provision is the inclusion of explanatory notes and warnings. Specifically, point (v) of the major provisions states that projected non-guaranteed benefits are based on the company’s current dividend/bonus scales and assumed investment returns, and are not guaranteed. The actual amounts payable can fluctuate, potentially being higher or lower than illustrated. Furthermore, it explicitly mentions that under certain circumstances, these non-guaranteed benefits may even be zero. This directly addresses the core concept of non-guaranteed benefits in participating policies and the inherent variability associated with them.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) emphasizes the importance of a robust underwriting process to ensure the financial stability of the insurer and fair treatment of policyholders. A key aspect of this is the accurate assessment of risk. When an applicant provides incomplete or potentially misleading information regarding their medical history, the underwriter’s primary responsibility, as guided by GL16, is to seek clarification and obtain the necessary details to make an informed decision. This involves requesting further medical reports or clarification from the applicant, rather than immediately accepting the risk, declining it, or assuming the information is accurate without verification. The guideline stresses due diligence in the underwriting process.

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 policy ownership 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 relevant policyholders, regardless of how they acquire the policy, are adequately informed about the product’s specifics and associated risks.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is responsible for licensing and regulating insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business. The scenario describes an individual acting as a broker, which falls under the definition of an insurance intermediary. Therefore, to legally operate as an insurance broker in Hong Kong, the individual must obtain a license from the IA. Options B, C, and D describe activities or entities that are not directly related to the primary licensing requirement for an individual insurance intermediary.

Renewable term insurance allows the policyholder to extend the coverage period without needing to provide new evidence of insurability. However, this renewal is subject to an increased premium that reflects the insured’s attained age at the time of renewal. This mechanism is designed to manage the risk associated with an older insured individual, as mortality rates generally increase with age. The question tests the understanding of how premiums are adjusted in renewable term policies, specifically linking the increase to the insured’s age.

The question tests the understanding of the conditions under which a Critical Illness (CI) benefit can be paid. According to the syllabus, a CI 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 CI benefit. Option B is incorrect because while a terminal illness is a trigger, the specified life expectancy of 12 months or less is a crucial condition that is omitted. Option C is incorrect because undergoing a specified medical procedure is a trigger, but the scenario describes a diagnosis of a disease, not a procedure. Option D is incorrect as the syllabus mentions that CI cover is typically only available to standard risks, but this is a restriction on eligibility, not a condition for benefit payout upon diagnosis.

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. Options B and C describe different types of riders or policy features that do not directly address the erosion of purchasing power due to inflation. Option D describes a benefit that is paid upon the death of the insured, which is a standard life insurance feature and unrelated to inflation adjustments for ongoing benefits.

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 face amount remains the same as the original policy, but the coverage duration is limited by the amount of cash value available to pay the premiums for that term. The policy is not surrendered for cash, nor is it converted to a paid-up policy with a reduced face amount. The scenario describes a situation where the policyowner has ceased premium payments, and the question asks about the outcome of utilizing the net cash value for extended term coverage.

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

The CIB Membership Regulation 14.5, as referenced in the provided text, outlines specific conditions under which a CIB Member may arrange insurance products from providers not authorized in Hong Kong. These conditions are strictly limited to situations where no suitable products are available from authorized insurers in Hong Kong, or when the client explicitly requests such an arrangement. Therefore, a CIB Member cannot unilaterally decide to source products from non-authorized providers simply because they believe it offers a better deal; client instruction or a demonstrable lack of suitable local options are prerequisites.

When replacing an existing life insurance policy with a new one, the insurance intermediary must meticulously document and explain various implications to the client. One crucial aspect relates to the contestability period and suicide clause. If a new policy is issued, these periods typically reset. This means that if the insured were to pass away due to suicide within the new policy’s contestability period, the claim might be denied by the new insurer, even if it would have been covered under the original policy. The intermediary’s duty is to inform the client about this potential change and to record the expiry dates of these periods for both the existing and new policies, unless the client explicitly waives this disclosure. The question tests the understanding of how policy replacement affects these critical clauses and the intermediary’s responsibility in managing this information.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually. These illustrations must reflect the current conditions and future outlook. This ensures that policyholders have a realistic understanding of their policy’s performance, especially concerning non-guaranteed elements like dividends and investment returns, which can fluctuate. The guideline aims to promote transparency and informed decision-making by policyholders regarding their long-term insurance products.

The scenario describes a policyholder who has a Long-Term Care (LTC) rider attached to their life insurance policy. The question asks about the premium treatment during the period LTC benefits are being paid. According to the syllabus, it is common for premiums to be waived for both the rider benefit and the basic insurance plan while LTC benefits are being disbursed to the policyholder. This waiver is a standard feature designed to alleviate the financial burden on the policyholder during a period of significant care needs.

The question tests the understanding of the “law of large numbers” in the context of life insurance premium calculation. The law of large numbers states that as the number of trials (in this case, insured lives) increases, the observed frequency of an event (death) will converge to its theoretical probability. This principle allows insurers to make reliable predictions about mortality rates for a large group, even though individual outcomes are uncertain. Therefore, mortality tables, which are based on historical data and statistical analysis of large populations, are fundamental to calculating premiums that are adequate and equitable.

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 while financial commitment is important for regular premium policies, it’s not the primary focus for single premium disclosure in the same way as the premium/liquid asset ratio. Option C is incorrect as it mixes requirements for both regular and single premium policies and omits key single premium disclosures like the lock-up period and financing risks. Option D is incorrect because it focuses on the client’s disposable income ratio, which is a requirement for regular premium policies, not single premium ones, and it also misses other crucial single premium disclosures.

A joint-life policy is designed to cover two or more individuals. The critical aspect is how the payout is triggered. A policy that pays out ‘on the first death’ is specifically structured to terminate and pay the benefit upon the demise of the first insured person. This contrasts with policies that might pay on the last death or have other payout conditions. Therefore, understanding the specific payout trigger is key to identifying the correct policy type.

When an insurance office identifies potential twisting, the Code of Conduct mandates specific actions to protect the policyholder. A crucial step is to inform the client about the unprofessional sale and offer them the choice to cancel the new policy and receive a full premium refund, while also reinstating their original policy. This communication must clearly state the agent’s suspension or the office’s cessation of accepting business from the involved broker representative, and the client is given a 30-day window to make this decision. The selling office is responsible for facilitating the return of premiums and reinstating the original policy, ensuring the client is returned to their prior financial position as much as possible.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual is acting as an intermediary without the necessary authorization, which is a contravention of the Ordinance. The correct answer emphasizes the need for a valid license issued by the IA to conduct insurance intermediary activities legally. Options B, C, and D represent incorrect assumptions about the regulatory landscape; for instance, relying solely on a company’s registration or a professional body’s membership does not substitute for the IA’s licensing requirement. The Insurance Ordinance mandates that any person who solicits, negotiates, or effects insurance business must be licensed by the IA.

When an insurance office identifies potential twisting, the Code of Conduct mandates a structured approach to address the situation and protect the policyholder. A crucial first step, as outlined in the regulations, is to acknowledge the client’s complaint and provide a timeline for the investigation. Specifically, the selling office must inform the client within 30 days of receiving the complaint about the findings and any proposed resolutions. This communication is vital for transparency and maintaining client trust during the investigation process. The other options describe actions taken *after* twisting is confirmed or relate to different stages of the process, such as reporting the agent or suspending business, which are subsequent steps.