Paper 3 Long Term Insurance Quiz 87

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 scenario highlights a common situation where an individual is acting as a broker for insurance products without the necessary authorization. The Insurance Companies Ordinance mandates that any person who solicits or procures insurance business must be licensed by the Insurance Authority. Failure to comply can result in penalties. Therefore, the individual’s actions are in contravention of the Ordinance, and they would be considered to be operating illegally without a license.

This question tests the understanding of the ‘extended term insurance’ non-forfeiture option. When a policyholder stops paying premiums, the accumulated net cash value can be used to purchase a term insurance policy. The key characteristic of this option is that the death benefit remains the same as the original face amount, and the term of this new policy is determined by how long the net cash value can sustain the premium payments for that death benefit. This contrasts with other options like reduced paid-up insurance, where the cash value buys a policy of the same duration but with a reduced death benefit, or a cash surrender, which simply returns the cash value.

The question tests the understanding of the purpose of providing a benefit illustration document to a prospective policyholder. According to the provided text, the Illustration Document must be given to the prospective policyholder for review before they sign the application form. This review process is crucial for the policyholder to understand the projected benefits and premiums. The declaration signed by the policyholder confirms their understanding of these illustrations. Therefore, the primary purpose is to ensure the applicant has reviewed and understood the projected financial outcomes of the policy before committing.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, and insurers must have a corporate policy on surplus allocation and dividend declarations, the final decision and responsibility for fair interpretation rests with the board.

The question tests the understanding of ‘Reversionary Bonus’ which is a type of financial interest where the full enjoyment is deferred to a future time or event. In the context of a with-profits policy, these bonuses are typically declared periodically and added to the policy’s value, but their ultimate payout is contingent on the policy remaining in force until a future event, such as maturity or death. Option B describes a ‘Rider’, which is an amendment to a policy that alters benefits. Option C refers to ‘Settlement Options’, which are choices for receiving policy proceeds after a claim. Option D describes ‘Subrogation’, a principle that allows an insurer to recover losses from a third party, which is not applicable to life insurance.

Policy revival, or reinstatement, refers to the process of restoring a lapsed insurance policy to its full coverage. This is typically allowed under specific policy conditions, which often include a time limit for exercising this option, the requirement to pay all overdue premiums along with applicable interest, and potentially other conditions such as providing evidence of insurability. The question tests the understanding of the conditions and limitations associated with bringing a lapsed policy back into force, as outlined in the IIQE syllabus regarding policy revival.

The Illustration Document for Investment-linked Policies (Version 2) mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the potential outcomes of their investment, separating what is assured from what is subject to market performance. The document emphasizes transparency regarding the underlying assumptions used in projections, such as investment growth rates and charges, to ensure a fair representation of the policy’s potential performance.

The question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the premium payment mode is annual. The provided text highlights that if premiums are waived on an annual basis, and the insured recovers after a short period of disability (e.g., 2 months), the waiver would continue for the full annual period, even though the insured is no longer disabled. This can lead to an undesirable situation where premiums are waived for a period the insured is not disabled. Some policies address this by automatically switching to a monthly premium mode for waiver purposes or by disallowing changes to premium frequency during disability. Therefore, the most accurate statement is that an annual premium waiver might continue for the entire period even after recovery, unless specific policy provisions alter this.

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 regulatory responsibilities or licensing procedures. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and consumer education, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates mandatory provident fund schemes, not general insurance intermediaries. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the initial licensing process.

This question tests the understanding of how inflation impacts long-term insurance policies and the role of specific riders in mitigating this effect. The Cost of Living Adjustment (COLA) rider is designed to periodically increase disability income benefits based on an independent index, such as the Composite Consumer Price Index. This directly addresses the erosion of purchasing power caused by inflation, ensuring that the real value of the benefits remains consistent over time. Other riders, while valuable, do not directly address the ongoing impact of inflation on the benefit payout itself. For instance, a Waiver of Premium rider addresses premium payments during disability, and specified event riders cover specific life occurrences, neither of which counteracts inflation’s effect on the benefit amount.

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. In the context of a with-profits policy, these bonuses are typically declared periodically but are only fully realized or payable upon the maturity of the policy or upon the death of the insured. Therefore, it represents a future entitlement rather than an immediate right or a guaranteed payment. Option B is incorrect because a ‘Settlement Option’ refers to how policy proceeds are paid out, not the nature of a bonus. Option C is incorrect as ‘Subrogation’ is a legal principle related to indemnity and does not apply to life insurance. Option D is incorrect because ‘Surrender Value’ is the cash amount received when a policy is terminated, which is distinct from a reversionary bonus.

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. The question tests the knowledge that an individual must be licensed by the IA to solicit or transact insurance business. Options B, C, and D represent entities or activities that are either not directly involved in licensing insurance intermediaries or are incorrect interpretations of the regulatory scope. For instance, the Hong Kong Monetary Authority (HKMA) regulates banks, and the Securities and Futures Commission (SFC) regulates the securities and futures markets. While some insurance products might be linked to investment, the primary licensing for insurance solicitation rests with the IA.

This question tests the understanding of the ‘cooling-off’ period for insurance contracts in Hong Kong, specifically concerning the right to cancel and receive a refund. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, such as the Insurance (General Provisions) Regulation, govern these aspects. The cooling-off period allows policyholders a statutory timeframe to reconsider their purchase. During this period, a policyholder can cancel the policy and is generally entitled to a refund of any premiums paid, subject to certain deductions as permitted by law, such as administrative expenses. The key is that the policyholder has the right to cancel without needing to provide a reason and is entitled to a refund of premiums paid, minus any permitted charges.

The CIB’s Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) mandates that CIB Members must conduct a thorough assessment of a client’s financial situation and existing insurance policies before recommending any 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 clients are not oversold or recommended products that do not align with their current financial standing or existing coverage, thereby fulfilling the duty of care and promoting suitability.

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 long-standing history of obstructive sleep apnoea, even if 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 scenario describes a policyholder who has a Long-Term Care (LTC) rider attached to their life insurance policy. The question asks about the premium payment during the period when LTC benefits are being received. According to the provided syllabus, it is common for premiums to be waived for both the rider benefit and the basic insurance plan during the period that LTC benefits are being paid to the policyowner-insured. Therefore, the policyholder would typically not need to pay premiums for either the LTC rider or the base policy while receiving LTC benefits.

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 illustrations but do not represent the primary regulatory requirement for distinguishing benefit types.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Option (a) correctly states that if the insured dies during the grace period before the premium is paid, the outstanding premium will be deducted from the death benefit. This is a crucial aspect of how grace periods function, preventing immediate lapse while still accounting for the unpaid premium. Option (b) is incorrect because while the initial premium payment is critical for policy activation, the grace period concept applies to subsequent premium payments. Option (c) is incorrect as payment within the grace period is considered timely for the purpose of keeping the policy in force, but it doesn’t retroactively make the premium payment ‘on time’ in the strictest sense if the due date has passed. Option (d) is incorrect because the scenario described in (i) of the original text (deduction of premium from death benefit) is a key feature of the grace period, not an exception that negates its purpose. The concept of ‘free insurance’ is related to specific policy types (like U.S. style policies lapsing at the end of the grace period) and not a universal outcome of dying within any grace period.

The Illustration Document for Investment-linked Policies (Version 2) mandates that illustrations must clearly distinguish between guaranteed and non-guaranteed benefits. This is crucial for policyholders to understand the potential outcomes of their investment, separating what is assured from what is projected based on market performance. The document emphasizes transparency regarding the underlying assumptions used in projecting non-guaranteed benefits, such as the projected investment returns and the allocation of policy charges. Therefore, a clear demarcation between guaranteed and non-guaranteed components is a fundamental requirement for accurate and responsible illustration.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the customer’s financial situation and the purpose of the insurance policy. This includes assessing the affordability of premiums relative to the policyholder’s income and financial commitments, and ensuring the policy aligns with their stated objectives. Option A is incorrect because while understanding the policy’s benefits is part of the process, it’s not the primary focus of the KYC procedure itself. Option C is incorrect as the insurer’s internal risk appetite is a separate consideration from understanding the client’s needs and financial capacity. Option D is incorrect because while compliance with anti-money laundering regulations is crucial, the specific focus of CIB-GN(4) is on the client’s financial suitability for the long-term insurance product.

Policy revival, also known as reinstatement, refers to the process of restoring a lapsed insurance policy to its full force. This is typically permitted under the policy’s terms and conditions, but it is subject to specific requirements. These requirements often include a time limit within which the revival must be requested, the payment of all overdue premiums along with applicable interest, and potentially other conditions such as providing updated health information or undergoing a medical examination to ensure the insured is still insurable. The core concept is to bring the policy back to its active state as if it had never lapsed, provided these conditions are met.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over time to a designated recipient. This stream of payments is contingent upon the life of a specific individual (the annuitant) or a predetermined period. In exchange for these future payments, the insurer receives consideration, which can be a lump sum or a series of payments. The key elements are the insurer’s promise, the periodic payments, the designated recipient, the annuitant, and the consideration paid. Option A accurately captures these essential components, distinguishing it from other financial products or insurance riders.

A Conditional Premium Receipt signifies that insurance coverage commences from the application date, contingent upon the applicant being deemed insurable on standard terms at that time. This contrasts with a Cover Note in general insurance, which provides temporary proof of insurance. A Binding Premium Receipt is the closest equivalent in life insurance, but the Conditional Premium Receipt specifically addresses the *condition* of insurability.

The question tests the understanding of ‘Reversionary Bonus’ in the context of with-profits policies. A reversionary bonus is a bonus that is added to the sum assured and becomes a guaranteed part of the policy value. It is ‘reversionary’ because its full enjoyment is deferred until a future event, typically the maturity or death claim of the policy. While it increases the policy’s value, it is not paid out immediately upon declaration. Options B, C, and D describe different concepts: a rider modifies benefits, settlement options are choices for payout, and subrogation is a legal principle not applicable 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, 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. Failure to obtain the necessary license constitutes a breach of the relevant legislation and can lead to penalties. The other options represent entities or concepts that are not directly responsible for the initial licensing of individual insurance intermediaries.

The scenario describes a situation where an insurance agent recommends a new policy that significantly alters the terms of an existing policy. The key indicator of ‘twisting’ is the recommendation of a replacement policy that is to the policyholder’s disadvantage. The provided information states that ‘twisting’ involves making inaccurate or misleading statements or comparisons to induce a policyholder to replace an existing policy with another life insurance policy to the policyholder’s disadvantage. In this case, the new policy has a lower sum insured for a similar premium and a reduced cash value, which clearly indicates a disadvantage for the policyholder. Therefore, the agent’s actions constitute twisting.

This question tests the understanding of the ‘cooling-off’ period for insurance contracts in Hong Kong, specifically concerning the right to cancel and receive a refund. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, such as the Insurance (General Provisions) Regulation, govern these aspects. A policyholder generally has a right to cancel a policy within a specified period (often 21 days from receiving the policy documents or the notice of acceptance, whichever is later) and receive a refund of any premiums paid, less any non-refundable charges as stipulated in the policy. The key is that the cancellation must be within this statutory period, and the refund is typically for the premiums paid, not including any administrative fees or charges that are explicitly stated as non-refundable.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, and insurers must have a corporate policy on surplus allocation and dividend declarations, the final decision and responsibility for fairness and equity rest with the board.

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. To conduct insurance business in Hong Kong, an entity or individual must be licensed by the IA. The question highlights a scenario where an individual is providing advice on insurance products without holding the necessary license, which is a contravention of the regulatory requirements. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries for insurance distribution. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the primary licensing of insurance intermediaries. Option D is incorrect because while professional bodies may set ethical standards, the ultimate legal authority for licensing and regulation rests with the IA.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, and insurers must have a corporate policy on surplus allocation and dividend declarations, the final decision and responsibility for fairness and equity rest with the board.