Paper 3 Long Term Insurance Quiz 72

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 die by 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 is obligated to inform the client about this potential change and to obtain the expiry dates of these periods for both the existing and new policies, unless the client explicitly declines to provide this information on the relevant form. This ensures the client is fully aware of the altered terms and potential claim implications.

This question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the disability commences and ends within a premium payment cycle. The core concept is that if premiums are waived on an annual basis, and the insured recovers before the next annual premium is due, the policy might still waive premiums for the entire annual period, leading to a potential over-waiver. To mitigate this, some policies automatically convert the premium payment mode to monthly for waiver purposes, or explicitly disallow changes to the premium frequency during disability. Option A is incorrect because it suggests a direct refund, which isn’t the primary mechanism for handling this timing mismatch. Option C is incorrect as it misinterprets the consequence of annual premium waivers by suggesting a continuous waiver regardless of recovery. Option D is incorrect because while a waiver is in place, the policy remains active, and the insurer’s obligation to waive premiums is tied to the defined disability period and policy terms, not an indefinite suspension.

The question tests the understanding of the Policyowner Service (POS) department’s role in managing policy changes. While all listed options are potential duties of POS, the specific focus on ‘policy changes’ as a distinct category within their responsibilities, as outlined in section 5.5.1, makes it the most accurate answer. The other options, while related to customer interaction or documentation, are either broader categories or specific examples that fall under the umbrella of policy changes or other POS functions.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums if they become totally disabled. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it assumes the premium payment responsibility on behalf of the disabled policyowner-insured. Therefore, the policy continues to function normally, including the accrual of cash value and participation in dividends, without any interruption or cessation of benefits.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it ensures its continuity by waiving future premium payments while the insured is disabled. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific physical loss like the loss of sight in both eyes or the use of both hands or feet.

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 aspects of financial services that are not directly applicable to the core issue of unauthorized insurance underwriting.

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.

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 licensing and regulating all insurance intermediaries. The question tests the knowledge that an individual must be licensed by the IA to solicit or transact insurance business, regardless of whether they are employed by an insurer or an intermediary firm. Options B, C, and D represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while an insurer can appoint licensed representatives, the individual themselves must be licensed. Option C is incorrect as the Hong Kong Federation of Insurers (HKFI) is an industry association and not a licensing authority. Option D is incorrect because the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediaries.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The primary goal of purchasing life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, the most crucial question an intermediary should ask is about the intended function or purpose of the insurance for the client. Option (a) focuses on the client’s financial capacity, which is important but secondary to understanding the need. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a subjective question that doesn’t directly elicit the client’s objectives. Option (d) addresses the premium amount, which is a consequence of the desired coverage and benefits, not the primary driver of the need.

This scenario describes an applicant who has disclosed a history of a serious medical condition that requires further investigation. According to underwriting principles, when an applicant’s disclosed health information necessitates more detailed examination beyond the standard application, the underwriter would typically request an Attending Physician’s Statement (APS). This document provides the underwriter with comprehensive medical history and current status from the applicant’s treating physician, allowing for a more accurate risk assessment. While a medical examination might be conducted, the primary step for clarifying specific disclosed conditions is the APS. A declined risk is a final decision, not an initial step. A preferred risk category is for individuals with demonstrably better-than-average health, which is not indicated here. A standard risk implies no abnormal features, which is also not the case given the disclosed medical history.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the projected values. According to the regulations, an illustration document must present projected surrender values and death benefits at specific intervals. These projections should be based on a set of assumed rates of return. The regulations specify that for Version 1 templates, four different assumed rates of return (0%, 3%, 6%, and 9%) should be used. For Version 2 templates, three rates (0%, 3%, and 6%) are required. The question asks about the minimum requirements for the assumed rates of return for Version 1, which correctly includes 0%, 3%, 6%, and 9%. Option B is incorrect because it omits the 9% rate. Option C is incorrect as it includes 12% which is not a prescribed rate. Option D is incorrect because it only lists three rates, not the four required for Version 1.

The Insurance Authority (IA) mandates the use of the Investor Protection Information Statement – Mainland Prospect (IFS-MP) for all new applications of long-term insurance policies for individual customers who are holders of a Hong Kong Resident Identity Card and are from the Mainland. This requirement applies across all distribution channels and covers specific classes of long-term business. Crucially, these customers are not permitted to opt out of this procedure. The regulation also extends to situations involving changes in policy ownership or assignments, where the new policyholder or assignee, if they are a PRC Resident Identity Card holder, must also complete the IFS-MP. This ensures that all relevant parties are adequately informed about the product’s nature and associated risks.

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. The other options describe different insurance concepts: a Guaranteed Insurability Option allows for purchasing additional coverage without further medical underwriting, a Graded-Premium Policy has premiums that increase over time while the death benefit remains constant, and an Immediate Annuity provides income payments starting immediately after purchase.

The Standard Illustration for universal life (non-linked) policies is designed to provide a minimum summary of benefits. A key aspect of this illustration is that it refers exclusively to the Basic Plan, explicitly excluding any riders or additional benefits. This ensures clarity and focuses the prospective policyholder on the core product features. The scenario presented describes a situation where an illustration includes benefits from a rider, which contradicts the fundamental requirement of the Standard Illustration to focus solely on the basic plan. Therefore, this would be a deviation from the prescribed format.

This question tests the understanding of the ‘Cooling-off Period’ in Hong Kong life insurance, as introduced by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. This ensures the policyholder has received the necessary documentation to make an informed decision. Options B, C, and D describe incorrect triggers for the start of the Cooling-off Period, such as the policy application date, the premium payment date, or the policy issue date without considering delivery or notice.

The core difference between life insurance and annuities lies in their fundamental purpose and the actuarial principles they are based upon. Life insurance is designed to provide a payout upon the occurrence of an event (death), thus premiums are structured to increase with age, reflecting a higher probability of death. Conversely, annuities are designed to provide a stream of income for as long as the annuitant lives, meaning the payout amount is influenced by the probability of living. Therefore, annuity payments increase with age at commencement because the insurer anticipates a shorter payout period, and men, generally having a shorter life expectancy than women, receive higher payments to compensate for the insurer’s reduced risk of a longer payout. This directly contrasts with life insurance where higher premiums are charged to older individuals due to increased mortality risk.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it ensures its continuity by waiving future premium payments. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific physical loss like blindness in both eyes or loss of use of limbs. The scenario presented in the study material highlights a restrictive definition where the insured’s ability to engage in *any* gainful occupation, even if different from their previous one, could lead to a claim denial. Therefore, the rider’s primary function is to maintain the policy’s active status without premium payment during a qualifying disability.

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.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically concerning the “fit and proper” requirements. The Insurance Authority (IA) mandates that all licensed insurance intermediaries must continuously meet these criteria. This includes having the necessary knowledge, skills, and experience, maintaining good character and integrity, and being financially sound. The scenario describes an intermediary who has failed to disclose a past regulatory action, which directly impacts their integrity and therefore their “fit and proper” status. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with the IA’s guidelines, outline these requirements. Failure to meet these standards can lead to disciplinary actions, including license suspension or revocation.

The Net Cash Value of a life insurance policy is the amount available to the policyowner after certain deductions are made from the policy’s cash value. These deductions are specifically mentioned in the syllabus as adjustments for items like paid-up additions, outstanding policy loans and their accrued interest, and any advance premium payments. Therefore, the Net Cash Value is not simply the stated cash value but a reduced amount reflecting these financial adjustments.

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, conducting additional inquiries, or even arranging for a medical examination if deemed necessary. Simply accepting the application without further investigation or declining it outright without due diligence would be contrary to the principles of sound underwriting. The guideline stresses the need for a thorough and fair evaluation of each applicant’s risk profile.

The question tests the understanding of the intermediary’s role in the application process, specifically concerning the disclosure of material facts. According to the syllabus, the application form is the primary source for underwriting, and intermediaries must ensure all material facts are disclosed. This includes providing full explanations for ‘Yes’ answers to health-related questions, along with relevant dates. Option (a) correctly reflects this duty by emphasizing the need for comprehensive details and dates when health issues are disclosed. Option (b) is incorrect because while the intermediary assists, the applicant is ultimately responsible for the accuracy of their statements. Option (c) is too narrow, as it only mentions financial changes and not the critical aspect of health disclosures. Option (d) is incorrect because the intermediary’s role is to facilitate accurate disclosure, not to determine what constitutes a ‘minor’ detail without proper context or client confirmation.

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 on modified terms, meaning the initial offer wasn’t accepted as is, and thus the contract doesn’t start until the revised terms are agreed upon.

This question tests the understanding of the fundamental 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’s crucial first step is to ascertain what financial protection or objective the client wishes the policy to fulfill. While affordability (premium) is important, it’s secondary to the core need. Commission rates are irrelevant to the client’s needs, and questioning the client’s perceived need directly can be perceived as dismissive. The question “What do you want the insurance to do for you?” directly addresses the client’s objectives and needs, guiding the subsequent product recommendation.

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 the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. Failure to obtain a license constitutes a breach of the law and can lead to penalties. Options B, C, and D describe entities or activities that are not directly related to the primary licensing requirement for insurance intermediaries under the relevant ordinance.

The question tests the understanding of the required disclosures in an illustration document for insurance products, specifically concerning the assumed rates of return. According to the regulations, illustrations for non-linked policies should present projected surrender values and death benefits based on a set of assumed rates of return. Version 1 templates require four rates (0%, 3%, 6%, and 9%), while Version 2 templates require three rates (0%, 3%, and 6%). The key is that for rates other than 0%, these are maximum rates, and insurers have the discretion to illustrate lower rates. The question specifically asks about the rates that *must* be included, and the 0%, 3%, and 6% rates are mandatory for Version 2, and 0%, 3%, 6%, and 9% for Version 1. Option A correctly identifies the rates required for Version 1, which is a comprehensive set. Option B is incorrect as it omits the 9% rate required for Version 1. Option C is incorrect as it includes a rate (12%) not specified in the regulations for either version. Option D is incorrect as it omits the 9% rate required for Version 1 and includes an unspecified rate (12%). Therefore, the most complete and accurate set of required rates for illustration purposes, covering the more comprehensive Version 1, is 0%, 3%, 6%, and 9%.

The scenario describes a situation where an insurance agent recommends a new policy that involves surrendering an existing policy. This action, where an existing policy is surrendered within 12 months of a new policy being effected, fits the definition of a ‘replacement’ as per the Insurance Code. The agent’s failure to properly document and explain the implications of this replacement, particularly the financial aspects like potential loss and annualized premiums, constitutes a breach of the regulations designed to prevent ‘twisting’ and protect policyholders. Specifically, the Code mandates that if a replacement is recommended, the intermediary must discuss and document the financial implications, including estimated losses and differences in annualized premiums, providing justifications where necessary. The agent’s actions suggest a disregard for these disclosure requirements, potentially leading to a policyholder’s disadvantage.

The question tests the understanding of the core functions within an insurance company, specifically focusing on the department responsible for managing policyholder requests and changes. Client service, also known as policyowner service, encompasses a range of activities aimed at maintaining the relationship with existing policyholders. This includes processing changes to policies (financial or non-financial), handling communications (correspondence, enquiries, complaints), providing documentation (like policy duplicates), and managing policy renewals, which are crucial for business retention. While claims administration involves processing claims, marketing focuses on product development and promotion, and underwriting deals with risk assessment, none of these departments are primarily responsible for the day-to-day servicing of existing policies and policyholder requests for modifications or information.

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 describe activities that might be related to the insurance industry but do not directly address the fundamental requirement for an individual to be licensed to conduct insurance business.