Paper 3 Long Term Insurance Quiz 81

A Conditional Premium Receipt provides temporary insurance coverage from the date of application, contingent upon the applicant being found insurable on standard terms at that time. This means that if the applicant passes away after receiving this receipt but before the policy is formally issued, and it’s determined they were insurable, the insurer is obligated to pay the death benefit. The other options describe different aspects of insurance: a Cover Note is a temporary proof of insurance in general insurance, a Binding Premium Receipt is the life insurance equivalent of a cover note for temporary coverage, and a Cooling-Off Period allows policyholders to cancel a policy within a specified timeframe after purchase.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the responsibilities of licensed insurance agents and brokers under the Insurance Companies Ordinance (Cap. 41). The scenario describes an agent acting on behalf of multiple insurers, which is a common practice. The key is to identify the primary regulatory obligation related to client information disclosure. Licensed intermediaries are mandated to provide clients with essential information about the products and the intermediaries themselves. This includes disclosing the names of the insurers they represent and any potential conflicts of interest. Option A is incorrect because while record-keeping is important, it’s not the most direct or primary disclosure requirement in this specific scenario. Option C is incorrect as the focus is on disclosure to the client, not internal reporting to the regulator, although that may also be required. Option D is incorrect because while professional indemnity insurance is a requirement for intermediaries, it’s a separate regulatory obligation from the initial disclosure of information to the client about the products and the intermediary’s affiliations.

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 gather all necessary details to make an informed decision. This involves requesting further medical reports, conducting additional investigations, or even declining the application if sufficient information cannot be obtained to assess the risk accurately. Simply accepting the application without addressing the discrepancies would be a violation of sound underwriting principles and regulatory expectations, as it could lead to adverse selection and financial losses for the insurer.

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 the importance of adhering to these licensing requirements to conduct insurance business legally. The other options represent incorrect regulatory bodies or incorrect legal frameworks that do not apply to insurance intermediaries in Hong Kong.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The scenario describes an individual acting as a broker without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry in Hong Kong. Any person or entity conducting insurance intermediary business, whether as an agent or a broker, must be licensed by the IA. Operating without a license is a contravention of the relevant legislation, leading to potential penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) is an industry association, it does not issue licenses. 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, not insurance distribution.

A Family Income Insurance policy is a form of decreasing term insurance. Its primary function is to provide a regular monthly income to the surviving spouse or dependents for a specified period after the insured’s death. This income stream is designed to replace the deceased’s earnings and cover ongoing living expenses for the family during a critical period. The benefit is paid out over a set term, and unlike a standard life insurance policy that pays a lump sum, it offers a stream of income. Therefore, it is a variation of decreasing term insurance that pays a monthly benefit for a specified period.

A Family Income Insurance policy is a form of decreasing term insurance. Its primary function is to provide a regular monthly income to the surviving spouse or dependants for a specified period after the insured’s death. This income stream is designed to replace the deceased’s earnings and cover ongoing living expenses for a defined duration, rather than a lump sum payout. Therefore, it is fundamentally structured to offer a stream of income over a set term.

The question tests the understanding of the Duty of Disclosure in insurance contracts, as stipulated by Hong Kong insurance law. This duty requires all parties to an insurance contract to reveal all material facts relevant to the risk being insured before the contract is concluded, regardless of whether these facts are specifically asked for. Failing to do so can render the contract voidable by the insurer. Option (a) correctly identifies this fundamental principle. Option (b) is incorrect because while an insurer must act in good faith, the primary obligation of disclosure rests on the proposer. Option (c) is incorrect as the duty of disclosure applies to all material facts, not just those that increase the risk. Option (d) is incorrect because the duty of disclosure is a pre-contractual obligation, not a post-contractual one, although there are ongoing duties in certain circumstances.

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 pertinent question an intermediary should ask to understand the client’s needs is what they want the insurance to achieve for their loved ones. Option (a) focuses on the client’s financial capacity, which is important but secondary to the purpose. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a subjective question that doesn’t elicit specific needs. Option (d) addresses affordability, which is a crucial factor, but understanding the ‘why’ (the purpose) must precede the ‘how much’ (the premium).

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 identified needs and circumstances. The initiative emphasizes a client-centric approach, moving beyond a simple product-push strategy to one of informed advice. Option B is incorrect because while affordability is a factor, it’s not the sole determinant of suitability. Option C is incorrect as the focus is on the client’s needs, not solely on the insurer’s profitability. Option D is incorrect because while regulatory compliance is essential, the FNA’s primary objective is client protection through needs-based selling.

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 a proprietary company, not a mutual one. Option (b) is incorrect because in a mutual company, ownership rests with policyholders, not shareholders. Option (c) is partially correct in that policyholders share in profits, but it’s the ownership structure (d) that defines this, not just an equal sharing of profits.

A Family Income Insurance policy is a form of decreasing term insurance. Its primary function is to provide a regular monthly income to the surviving spouse or dependents for a specified period after the insured’s death. This income stream is designed to replace the deceased’s earnings and cover ongoing living expenses for the family during a critical period. The benefit is paid for the remainder of a predetermined term, offering financial stability during a time of transition.

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 Office of the Privacy Commissioner for Personal Data focuses on data privacy, not the licensing of financial service providers.

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 scenario describes an individual acting as a broker without the necessary authorization. The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Engaging in insurance intermediary activities without a valid license is a contravention of the Ordinance, leading to potential penalties. Option B is incorrect because while the IA oversees the industry, it’s the licensing itself that is mandated by the Ordinance. 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 have codes of conduct, the primary legal requirement for conducting insurance business stems from the IA’s licensing regime under the Ordinance.

This question tests the understanding of the “cooling-off” period requirement under the Insurance Ordinance (Cap. 41), specifically concerning the cooling-off period for new policies. The Insurance Ordinance mandates a cooling-off period for certain types of insurance policies, allowing policyholders to reconsider their purchase. This period is typically 14 days, commencing from the day the policyholder receives the policy documents. During this period, the policyholder can cancel the policy and receive a refund of any premiums paid, subject to certain deductions for any medical examination or other expenses incurred by the insurer. The question highlights a scenario where a policyholder wishes to cancel a newly issued policy within this statutory period, and the correct understanding is that the insurer must process this cancellation and refund the premiums, minus allowable expenses, as per the regulations.

The scenario describes a situation where an insurance intermediary is providing a temporary insurance cover. According to the provided text, in non-life insurance, a document used to provide temporary, unconditional, but cancellable cover is known as a ‘Cover Note’. This cover note is typically for a limited duration, often 30 days, and its validity might be contingent on premium payment. The question tests the understanding of this specific type of temporary cover in the non-life insurance context, differentiating it from other forms of temporary arrangements.

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 response identifies the primary regulatory body responsible for issuing licenses and enforcing compliance in this context.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually, reflecting current conditions and future outlooks. This ensures policyholders have access to the most relevant information regarding their participating policies, especially concerning non-guaranteed elements like dividends and their impact on policy values. While annual statements may highlight dividend changes, the core requirement is the refreshed illustration itself.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between full and partial benefits. The provided text states that a sum equal to the accidental death benefit is usually payable for the loss of two limbs or total blindness, while a stated proportion of the accidental death benefit is paid for the loss of one limb, sight in one eye, or other specified lesser injuries. Therefore, losing one limb and the sight in one eye would fall under the category of lesser injuries, warranting a proportional payout rather than the full accidental death benefit.

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 disability income benefits, directly linking these increases to a recognized independent index like the Composite Consumer Price Index. This ensures that the real value of the benefits keeps pace with inflation, maintaining their purchasing power over time. Other options describe different policy features or are incorrect interpretations of how inflation is addressed in insurance.

The question tests the understanding of the specific disclosure requirements for recommending a single premium policy under the IIQE syllabus. According to the regulations, 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 incorrectly includes the ratio of regular premiums to disposable income, which is a requirement for regular premium policies. Option C incorrectly mentions the premium payment term extending beyond retirement age, which is also specific to regular premium policies. Option D is partially correct by mentioning the lock-up period but omits the crucial premium/liquid asset ratio and the details regarding financing/leverage.

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.

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 would need funds to pay off the remaining balance. The other options describe different types of policies or features: a joint-life policy paying on the last death would provide a benefit upon the second death, key person insurance is for business protection, and a level term insurance policy has a death benefit that remains constant throughout its term.

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 proper authorization, which is a contravention of the Ordinance. The correct answer emphasizes the need for a valid license issued by the IA to conduct such activities legally. The other options represent incorrect assumptions about regulatory oversight or alternative licensing bodies that do not apply to insurance intermediaries in Hong Kong.

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 disability income benefits, directly linking these increases to a recognized independent index like the Composite Consumer Price Index. This ensures that the purchasing power of the benefits keeps pace with inflation over the life of the policy. Other options describe different rider functionalities or are irrelevant to the concept of adjusting benefits due to inflation.

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

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and the purpose of the insurance policy. This includes assessing the client’s ability to afford the premiums, the suitability of the product for their needs, and identifying any potential money laundering risks. While verifying identity is a fundamental KYC step, the note specifically highlights the need to go beyond basic identification to understand the client’s financial capacity and the rationale behind their insurance purchase to ensure the product is appropriate and to mitigate risks.

The ‘entire contract’ provision in a life insurance policy is a fundamental clause that defines the complete agreement between the insurer and the policyowner. It clarifies that the policy document itself, along with any attached riders (endorsements or amendments that add or modify coverage) and a copy of the application, constitutes the entirety of the contract. This provision is crucial because it prevents either party from later introducing external documents or verbal agreements as part of the contract. It also specifies that only authorized senior officials of the insurance company can alter the contract, and any such changes must be in writing and agreed upon by the policyowner. Option (b) is incorrect because it describes the incontestability provision, not the entire contract provision. Option (c) is incorrect as it focuses on the role of the policyowner in contract changes, which is a component but not the entirety of the provision. Option (d) is incorrect because it describes the conditions under which a contract can be contested, which is the opposite of the entire contract provision’s purpose of defining the contract’s completeness.

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 Federation of Insurers is a self-regulatory organization, it does not issue licenses. Option C is incorrect as the Mandatory Provident Fund Schemes Authority regulates MPF schemes, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission regulates the securities and futures markets, not insurance intermediaries.

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.