Paper 3 Long Term Insurance Quiz 75

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 typically receive higher payouts than women of the same age in annuities because actuarial data often indicates longer life expectancies for women, thus requiring more benefit payments over time. The question tests the understanding of this inverse relationship in underwriting philosophy.

The scenario describes an applicant whose medical assessment indicates a higher-than-average risk. The insurer’s options for handling such a situation are outlined in the provided text. Loading the premium is a standard underwriting practice to account for increased risk, making the policy insurable at a higher cost. Refusing to insure (declinature) is a more severe measure, while offering a limited plan or specific exclusions are also possibilities but less common than premium adjustments for general substandard risks. A ‘debt on the policy’ is a specific method for decreasing mortality risk, not a general response to any substandard risk. Therefore, adjusting the premium to reflect the increased risk is the most typical and appropriate underwriting action in this context.

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. Failure to obtain the necessary license can result in penalties. The other options are incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, the Securities and Futures Commission (SFC) regulates the securities and futures markets, and the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, none of these bodies are directly responsible for licensing insurance intermediaries. The Insurance Authority is the sole regulator for this purpose.

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 licensing ensures that intermediaries meet certain standards of competence, professionalism, and financial soundness, thereby protecting policyholders. 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 Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, although there can be overlap in regulated products, the primary licensing for insurance intermediaries falls under the IA.

Policy revival, also known as reinstatement, refers to the process of restoring a lapsed insurance policy to its full force. This is typically subject to certain conditions, which may include a specified time limit for exercising this option, the repayment of all overdue premiums along with applicable interest, and potentially other requirements to ensure the policyholder’s insurability is still acceptable to the insurer. The question tests the understanding of the conditions and limitations associated with bringing a lapsed policy back into effect.

The scenario highlights a situation where a policyholder is seeking a refund outside the stipulated cooling-off period. According to the provided guidelines, insurance intermediaries (LIMs) are required to maintain records of complaints or disputes where clients are refused refunds outside the cooling-off period and must provide these records to the HKFI upon request. This ensures transparency and allows for regulatory oversight of such cases.

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.

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 conduct of insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business in Hong Kong. The question highlights a scenario where an individual is acting as a referral agent, which, depending on the nature and extent of the referral activities, could be construed as soliciting insurance business, thus requiring a license. The other options represent incorrect interpretations of regulatory responsibilities or licensing requirements. A financial institution might be licensed to conduct insurance distribution, but an individual acting on its behalf in a capacity that involves soliciting business generally needs their own license. The Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, but the licensing of insurance intermediaries falls under the IA’s purview. The Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries directly, although there can be overlap in products.

The scenario describes a situation where an insurance agent recommends a new policy that significantly alters the terms of an existing policy, specifically by reducing the sum insured by more than 50%. According to the Code of Conduct, a ‘replacement’ occurs when a new policy is effected and, within 12 months, an existing policy’s substantial part (defined as 50% or more) of the sum insured lapses, is surrendered, or is converted to a reduced paid-up or extended-term status. Taking out a policy loan against a substantial part of the guaranteed cash value also constitutes a replacement. The agent’s actions, by facilitating a reduction in the sum insured of the existing policy by over 50%, clearly fall under the definition of a replacement. The Customer Protection Declaration (CPD) form is specifically designed to identify and document such replacement situations, requiring the intermediary to explain the implications to the policyholder. Therefore, the agent’s actions necessitate the completion of a CPD form.

This question tests the understanding of how premiums are handled in a life insurance policy that has an age-related limitation on premium payments. The scenario describes a policy where premiums cease at a specific age, say 65. If the policyholder dies before this age, premiums are only payable up to the date of death. This means that if death occurs after the age of 65, no further premiums are due, and the policy continues to be in force (assuming it’s still active and funded). Therefore, the statement that premiums would continue to be paid until the policyholder reaches age 65, regardless of when death occurs, is incorrect if death occurs before 65, and also incorrect if death occurs after 65 (as premiums would have already ceased). The correct understanding is that premiums are paid until the specified age or until death, whichever comes first, but once the age limit is reached, no further premiums are required.

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. Therefore, 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 the new policies, unless the client explicitly declines to provide this information on the relevant form.

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, which, depending on the nature and extent of the referral activities, could be construed as soliciting insurance business. Therefore, to ensure compliance with the Insurance Companies Ordinance and to avoid engaging in unlicensed regulated activities, the individual should seek a license from the IA. Options B, C, and D represent incorrect approaches. Seeking approval from a specific insurance company (B) is insufficient as licensing is a statutory requirement. Registering with a trade association (C) is a voluntary professional step but does not confer the legal authority to conduct regulated activities. Simply informing the Hong Kong Federation of Insurers (D) is also not a substitute for the mandatory licensing by the IA.

This question tests the understanding of the ‘Cooling-off Period’ as stipulated by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their life insurance purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Therefore, if a policyholder receives the policy document on March 1st and a separate notice on March 5th, the 21-day period begins on March 1st, making March 22nd the last day to exercise the right.

Unit-linked policies derive their value from underlying investment funds. The policyholder bears the investment risk, meaning the policy’s value fluctuates with the performance of these funds. While insurers manage the funds, the ultimate value is tied to market movements, not guaranteed by the insurer beyond any specific guarantees offered. Therefore, the policy value is directly reflective of the performance of the chosen investment assets.

The Illustration Document for Investment-linked Policies (Version 2) issued by the SFC mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the nature of the returns they can expect. Non-guaranteed benefits, such as projected investment growth, are subject to market fluctuations and are not assured. Therefore, any illustration must explicitly label these components to avoid misleading the consumer about the certainty of the projected outcomes. The other options describe aspects that might be present in an illustration but do not represent the primary regulatory requirement for distinguishing benefit types.

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, which is a contravention of the Ordinance. The correct answer identifies the primary regulatory body responsible for enforcing these licensing requirements. Options B, C, and D represent other significant financial regulators or bodies in Hong Kong, but they are not directly responsible for the licensing and regulation of insurance intermediaries under the Insurance Companies Ordinance.

The illustration document for insurance products must clearly state that the assumed rates of return are for illustrative purposes only, are neither guaranteed nor based on past performance, and that actual returns may differ. This is a crucial disclosure to manage policyholder expectations and prevent misrepresentation. The other options describe elements that might be included in an illustration or are related to policy terms, but they do not represent the mandatory disclaimer regarding the nature of the assumed rates.

The question tests the understanding of the ‘adequate’ and ‘equitable’ principles in life insurance premium calculation. An adequate premium ensures the insurer has sufficient funds to meet its obligations, including paying benefits and covering operational costs. An equitable premium means that each policyholder pays an amount proportionate to the risk they represent and the benefits they are entitled to. Option (a) correctly identifies both these fundamental principles. Option (b) is incorrect because while expenses are a factor, they are part of the loading on the net premium, not a primary principle of premium calculation itself. Option (c) is incorrect as ‘interest’ is a component of the net premium calculation, not a principle governing the overall premium adequacy or fairness. Option (d) is incorrect because ‘mortality’ is a key factor in determining the net premium, but ‘equitable’ is the principle that ensures fairness in how this factor is applied across policyholders.

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 representative of an insurance broker, which falls under the definition of an insurance intermediary. Therefore, to legally conduct such activities, the individual must hold a valid license issued by the IA. Options B, C, and D describe activities or entities that are not directly relevant to the licensing requirement for an individual intermediary acting on behalf of a broker.

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 licensing 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 Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, which is a specific type of retirement scheme, but not the broader insurance intermediary licensing.

The level premium system, as described, involves charging a premium that remains constant throughout the policy’s term. In the early years, this premium is higher than the actual cost of insurance for that year. This excess premium, along with the interest earned on it, accumulates to form a reserve. This reserve is then used to offset the shortfall in premiums during the later years of the policy, when the cost of insurance naturally increases with age. This mechanism allows for a stable, predictable premium for the policyholder while ensuring the insurer can meet its long-term obligations. The natural premium system, in contrast, charges premiums that increase annually with the insured’s age, reflecting the rising mortality risk, which is less attractive for long-term planning.

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 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 the IA, to comply with regulatory requirements and ensure clarity for the target audience. This document outlines key policy terms, benefits, risks, and other essential information in a language readily understood by Mainland Chinese residents, thereby upholding the principle of fair dealing and consumer protection.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any attached endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the terms of the contract must be made in writing and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, it’s not the sole condition; the change must also be formally incorporated into the contract. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but it’s not sufficient on its own without formal amendment. Option (d) is incorrect as senior officials’ say-so does not override the contractual requirement for written amendment.

This question tests the understanding of the ‘Cooling-off Period’ as stipulated by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their life insurance purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Therefore, if a policyholder receives the policy documents on January 15th, the Cooling-off Period would begin on that date. The period lasts for 21 days. Counting 21 days from January 15th, the last day to exercise the right would be February 5th. Options B, C, and D represent incorrect calculations or misinterpretations of when the period starts or its duration.

This question assesses the understanding of the core principle behind the Financial Needs Analysis initiative, which is to ensure that financial products are suitable for a client’s specific circumstances and objectives. The initiative emphasizes a proactive approach to identifying and addressing potential shortfalls or excesses in a client’s financial plan, rather than simply reacting to market changes. Option B is incorrect because while market conditions are a factor, the primary focus is on the client’s needs. Option C is incorrect as the initiative is not solely about compliance but about client-centricity. Option D is incorrect because while affordability is a component, it’s part of a broader needs assessment.

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 policyholders have a realistic understanding of their policy’s performance, especially concerning non-guaranteed elements like dividends, which are influenced by investment returns. Highlighting changes to policy dividends and providing reasons is a key aspect of this disclosure requirement.

This question assesses 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. Intermediaries, including individual agents and brokers, must be licensed by the IA to conduct regulated activities. The question tests the knowledge that an individual must hold a valid license issued by the IA to lawfully solicit or transact insurance business. Without this license, any such activity would be in contravention of the Ordinance.

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 joint mortgage where the surviving spouse needs funds to pay off the remaining balance. The other options describe different types of policies or riders: a key person policy insures an individual whose death would financially impact a business, a level term insurance provides a fixed death benefit for a specified period, and a life income annuity with a period certain provides income for life with a guaranteed payout period.

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 because it is adjusted for certain outstanding amounts. These adjustments typically include deductions for any outstanding policy loans and their accrued interest, as well as any advance premium payments made by the policyowner. Paid-up additions, if any, are usually added to the cash value, not deducted. Therefore, the net cash value reflects these specific financial adjustments.