Paper 3 Long Term Insurance Quiz 69

The Net Cash Value of a life insurance policy is the amount available to the policyowner for various options like surrender or purchasing paid-up additions. This value is not simply the stated cash value; it is adjusted for certain outstanding amounts. Specifically, it is reduced by any outstanding policy loans and their accrued interest, as well as any advance premium payments made by the policyowner. Paid-up additions, which are small amounts of additional insurance purchased with dividends, increase the cash value and are therefore added to the cash value to determine the net cash value. Therefore, the correct calculation involves subtracting loans and interest, and adding paid-up additions and advance premium payments.

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. 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 licensing and regulatory landscape. Option B is incorrect because while professional bodies may offer certifications, they do not replace the statutory licensing requirement by the IA. Option C is incorrect as the Hong Kong Federation of Insurers is an industry association and does not issue licenses. Option D is incorrect because while the IA sets conduct standards, the primary requirement for engaging in insurance business is the license itself.

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. The question presents a scenario where an individual is acting as a broker without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the licensing and regulatory landscape. 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 for individual intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediaries. Option D is incorrect because while professional bodies may offer certifications, they do not confer the legal authority to conduct regulated activities; that authority comes solely from the IA’s license.

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 in writing that their complaint has been received and commit to providing findings and proposed resolutions within 30 days of the complaint’s receipt. This ensures transparency and manages client expectations during the resolution process. The other options describe subsequent actions or different scenarios not directly related to the initial acknowledgment and commitment.

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. The question presents a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the regulatory requirements. Therefore, the correct course of action for such an individual is to cease all such activities until a license is obtained.

The CIB’s Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) emphasizes that CIB Members must conduct a thorough assessment of a client’s financial situation and existing insurance policies before recommending new or additional long-term insurance. This includes understanding their financial commitments, income, needs, and priorities. If a client already has a long-term policy that is in force, paid-up, suspended, or under a premium holiday, the CIB Member must first advise on appropriate options within that existing policy that align with the identified needs. Only after considering these existing arrangements should a recommendation for a new or additional policy be made. This ensures that the client’s current financial arrangements are optimized and that new recommendations are truly necessary and suitable.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. The question highlights a common scenario where an individual might engage in insurance-related activities without the necessary authorization. The correct answer emphasizes the requirement for a license to conduct such business, as stipulated by the relevant legislation. The other options present incorrect scenarios, such as operating under a general business license, relying on a company’s license without individual authorization, or assuming that informal agreements suffice, all of which are contrary to the regulatory requirements designed to protect policyholders and maintain market integrity.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Options B, C, and D describe entities or functions that are related to the financial sector but are not the primary licensing authority for insurance intermediaries in Hong Kong.

This question tests the understanding of the core purpose of life insurance from the policyholder’s perspective. The primary goal of life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, an intermediary should first ascertain what financial needs the insurance is intended to meet. Option (a) is incorrect because while financial capacity is important, it’s secondary to understanding the need. Option (b) is irrelevant to the policyholder’s needs and focuses on the intermediary’s compensation. Option (c) is a valid question but less direct than understanding the intended purpose; the policyholder likely believes they need it if they are making an enquiry. The most effective opening question, as highlighted in the study material, is to understand the ‘why’ behind the enquiry, which directly relates to the desired function of the insurance.

The principle of utmost good faith in insurance mandates that applicants disclose all material facts that could influence an insurer’s underwriting decision. In this scenario, the applicant’s history of obstructive sleep apnoea, even if seemingly unrelated to the subsequent critical illness, was deemed material by the insurer’s underwriting manual. The manual indicated that the severity of sleep apnoea and associated conditions could affect underwriting for critical illness and waiver of premium benefits. The applicant’s failure to disclose this condition, which would have prompted the insurer to seek further information or medical examinations, constitutes a breach of this duty. The Complaints Panel’s decision to uphold the insurer’s rejection of claims is based on the materiality of the non-disclosed fact to the underwriting process, not on a direct causal link between the sleep apnoea and the colon cancer.

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 features, benefits, risks, and charges. This includes confirming that the customer has been given adequate opportunity to ask questions and that their queries have been satisfactorily addressed. The intermediary must also confirm that the customer understands the nature of the product and its suitability for their needs. The form is a testament to the intermediary’s commitment to ethical sales practices and adherence to regulatory guidelines aimed at safeguarding consumer interests in the insurance sector.

This question tests the understanding of the fundamental structure and ownership of a mutual life insurance company. In a mutual company, the policyholders are the owners. This ownership structure means that policyholders share in the profits and dividends of the company, as they are essentially co-owners. Option (a) describes a characteristic of proprietary companies, not mutual ones. Option (b) is incorrect because proprietary companies are owned by shareholders. Option (c) is partially correct in that policyholders share in profits, but it’s the ownership by policyholders that is the defining characteristic, not just the equal sharing of profits.

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: 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 for individual intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFSA) regulates mandatory provident fund schemes, not general insurance intermediaries. Option D is incorrect because while professional indemnity insurance is a requirement for intermediaries, it does not substitute for the primary 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 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 referral activities, if they involve soliciting or transacting insurance business, require a license. The relevant legislation mandates that any person carrying on the business of insurance or acting as an insurance intermediary must be licensed by the IA. Therefore, the individual’s actions are in contravention of the Insurance Companies Ordinance.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) regulates the business of insurance in Hong Kong, specifically concerning the licensing and conduct of insurers. The scenario describes an entity operating without the necessary authorization, which directly contravenes the Ordinance’s provisions designed to protect policyholders and maintain market integrity. The other options represent different regulatory frameworks or concepts that are not directly applicable to an unauthorized entity conducting insurance business.

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 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 the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets. Option D is incorrect because while professional bodies may set ethical standards, the ultimate licensing and regulatory authority rests with the IA.

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. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the relevant legislation. 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 the industry, it is not the licensing authority. Option C is incorrect as the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. Option D is incorrect because while professional bodies may offer certifications, they do not confer the legal right to act as an insurance intermediary; that authority rests solely with the IA.

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 acting as an intermediary for insurance business must be licensed by the IA to conduct such activities legally. Failing to obtain the necessary license constitutes a breach of regulatory requirements and can lead to penalties. Therefore, the primary legal obligation for an individual intending to solicit insurance business is to secure a license from the Insurance Authority.

The question tests the understanding of how companies can customize illustration documents according to regulatory guidelines. Section 5/24 (b) explicitly states that companies may exclude irrelevant information and include additional relevant information, provided it is not misleading and does not detract from the standard disclosures. Option A is incorrect because while consistency in terminology is important, the primary focus of customization is relevance and non-misleading content. Option C is incorrect as the primary constraint on additional information is that it must be relevant and not misleading, not that it must be limited to product features already present in the standard document. Option D is incorrect because the guidelines allow for the inclusion of additional information as long as it meets specific criteria, not just the exclusion of non-applicable data.

The question tests the understanding of the principle of indemnity and its application to different types of insurance. The principle of indemnity aims to restore the insured to the financial position they were in before the loss occurred, preventing them from profiting from an insurance claim. Life insurance, however, is not typically subject to this principle. In life insurance, the sum assured is a pre-agreed amount that is paid upon the occurrence of the insured event (death or survival to a certain age), regardless of the actual financial loss incurred. Therefore, it is permissible and common for an individual to hold multiple life insurance policies, and each policy will pay out its full sum assured independently. This contrasts with general insurance (like property or motor insurance), where the principle of indemnity applies, and having multiple policies for the same risk would lead to claims being shared proportionally among insurers to avoid over-indemnification and potential fraud.

When recommending a regular premium policy, a CIB Member must ensure that the client understands the financial commitment. This includes presenting the ratio of regular premiums to the client’s disposable income, the total financial commitment including any rider premiums, and crucially, if the premium payment term extends beyond the client’s target retirement age, the intended source of funds for those later payments must be clarified. The client must then declare their comfort with the premium-to-income ratio, their consent to the financial commitment, and their ability to pay premiums post-retirement, if applicable. Option B is incorrect because it focuses on single premium policies. Option C is incorrect as it omits the crucial aspect of post-retirement payment sources. Option D is incorrect because it focuses on the lock-up period, which is relevant for single premium policies, not regular premium ones.

A deferred annuity is a contract where the commencement of benefit payments is postponed to a future date, typically a specified age or time. This delay allows the accumulated value to grow further before payouts begin. The other options describe different types of insurance or policy features: Endowment insurance pays out upon survival to maturity or death within the term; Disability Income rider provides income during disability; and Double Indemnity Benefit pays an additional amount if death occurs due to an accident.

This question tests the understanding of how premiums are utilized in a unit-linked policy. The core principle of unit-linked insurance is that a portion of the premium is used to purchase units in a specified fund. The policy’s value then fluctuates based on the performance of these units. Therefore, the most accurate description is that premiums are allocated to purchase units in a fund, and the policy’s value is tied to the performance of those units.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this erosion of purchasing power. The Cost of Living Adjustment (COLA) rider is explicitly designed to periodically increase disability income benefits in line with a recognized index, such as the Composite Consumer Price Index, thereby maintaining the real value of the benefit 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 disability income benefits.

This question tests the understanding of how the Guaranteed Insurability (GI) benefit operates in Hong Kong life insurance policies, specifically concerning the policyowner’s right to purchase additional coverage. The core principle of a GI benefit is that it allows the policyowner to increase coverage at specific future points without needing to provide new evidence of insurability. This is crucial for individuals whose health might deteriorate over time, making future insurance purchases difficult or impossible. The scenario highlights a situation where the policyowner has a right to exercise this benefit but has not yet done so. The question probes the consequence of this inaction, which is that the specific opportunity to exercise the benefit at that particular trigger event is forfeited. However, the benefit itself is not necessarily lost entirely; the policyowner may still be able to exercise it at a subsequent specified option date or event, provided they meet the terms of the policy. Therefore, the most accurate statement is that the right to purchase additional coverage at that specific instance is lost, but the overall benefit might persist for future opportunities.

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 focuses on data privacy, which is a separate regulatory concern from the licensing of insurance intermediaries.

This question tests the understanding of how a conditional premium receipt functions in life insurance applications. A conditional receipt signifies that coverage begins from the application date, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but on different terms (e.g., higher premium, reduced coverage), the contract doesn’t commence until these revised terms are accepted. If the applicant becomes uninsurable or dies after applying but before policy issuance, they are still covered if they were insurable at the application date. The scenario describes a situation where the applicant is found insurable but with a higher premium, meaning the initial offer wasn’t accepted on its exact terms, and thus, the contract doesn’t start until the revised terms are agreed upon.

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 PAR policies compared to non-participating (NON-PAR) policies, as the higher premium accounts for the possibility of future dividend payments to the policyholder. Non-participating policies do not offer this profit-sharing feature, and therefore, their premiums are generally lower.

The question tests the understanding of the specific disclosure requirements for recommending a single premium policy under the relevant regulations. The regulations mandate that 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 incorrectly suggests including the ratio of regular premiums to disposable income, which is a requirement for regular premium policies. Option C 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 D is incorrect as the policy illustration is a separate document provided by the insurer and not something the CIB Member includes as part of their written recommendation’s bases.