Insurance Intermediaries

Quality Assurance Scheme

Long Term Insurance Examination

Study Notes
2017 Edition
 Study Notes for Long Term Insurance Examination
Update 2

Voluntary Health Insurance Scheme, HKMC Annuity Plan and Tax Deductions
for Deferred Annuity Premiums

With the Voluntary Health Insurance Scheme (“VHIS”) fully launched, i.e. offered to
consumers, on 1 April 2019, individual hospital insurance consumers are now given
the choice of buying indemnity hospital insurance plans certified by the Food and
Health Bureau under the VHIS (“Certified Plans”). Certified Plans offer policyholders
a number of attractive product features and the statutory right to claim tax deductions
for qualifying premiums paid.

Another recent major development in the local insurance market is the HKMC Annuity
Limited’s launch of an immediate life annuity scheme named the “HKMC Annuity
Plan” for subscription by senior citizens, which offers an additional option of financial
arrangement for retirement. More recently, to implement the Government’s initiative
to provide tax deductions for deferred annuity premiums and Mandatory Provident
Fund tax deductible voluntary contributions in order to encourage voluntary savings
for retirement, the required legislative process has been completed.

This Update serves to set out the textual updates to the Study Notes for the Long Term
Insurance Examination (2017 Edition) to reflect the aforesaid developments.

1. The following items are added to the Table of Contents:

2.3.1a HKMC Annuity Plan – a public immediate life annuity scheme

2.3.1b Tax Deductions for Deferred Annuity Premiums

3.4a Voluntary Health Insurance Scheme

2. The following text is inserted immediately after Section 2.3.1(d):

2.3.1a HKMC Annuity Plan – a public immediate life annuity scheme

(a) Overview

On 5 July 2018, the HKMC Annuity Limited (“HKMCA”), wholly-

owned by the Hong Kong Mortgage Corporation Limited, officially
launched an immediate whole of life annuity scheme named the
“HKMC Annuity Plan”, for subscription by Hong Kong Permanent
Residents aged 65 or above. By providing the annuitant with a steady
stream of guaranteed monthly annuity payments (which are fixed

1
 amounts) after receiving a single premium, the HKMC Annuity Plan
enables the annuitant to better plan his retirement life.

Interested persons can make sales appointments with the HKMCA

directly.

(b) Product Features

Below is a summary of the product features of the HKMC Annuity

Plan:

(i) Minimum and maximum premium amounts per person:

Depending on the monthly annuity payment amount needed,
applicants may subscribe a single premium within the range of
$50,000 - $3,000,000.

(ii) Guarantees: Taking into account annuitants’ possible fear of

being disadvantaged for premature death, the HKMC Annuity
Plan offers a guarantee of minimum total annuity payment.
In the event that the annuitant dies within the Guaranteed
Period (i.e. the period that commences from the premium start
date and lasts until the guaranteed monthly annuity payments
made by the HKMCA reach a sum equal to 105% of the
premium paid), the designated beneficiary will receive the
Monthly Death Benefit Payments (i.e. the remaining unpaid
guaranteed monthly annuity payments) until the cumulative
payments made (to the annuitant and the beneficiary combined)
reach the guaranteed minimum total payment (i.e. 105% of the
premium paid). Alternatively, the beneficiary may choose to
receive a Lump-sum Death Benefit Payment equivalent to the
higher of (i) the guaranteed cash value of the policy as at the
date on which the death claim application is received by the
HKMCA (which may result in a financial loss); and (ii) 100 %
of the premium paid less the cumulative guaranteed monthly
annuity payments made by the HKMCA as at the date on which
the death claim application is received by the HKMCA, without
extra discount (thus avoiding the financial loss in the case of (i)
immediately above).

(iii) Policy surrender: The policyowner may surrender the policy

within the Guaranteed Period in return for a surrender value. It
is important for potential policyowners to note that early
surrender may result in a financial loss, which could be
significant at times.

2
 (iv) Special withdrawal: The policyowner may apply for a special
withdrawal for paying medical or dental expenses incurred in
Hong Kong within the Guaranteed Period. The amount
withdrawn may be used for medically/dentally necessary
medical/dental treatment or examination, without being
restricted to specified critical illnesses. Subject to an upper
limit of $300,000, the amount withdrawn would be the lower of
(i) 50% of the premium paid, and (ii) the premium paid less the
cumulative guaranteed monthly annuity payments made.
Special withdrawal may only be made once, and will result in a
proportional reduction of the guaranteed monthly annuity
payments, without extra discount.

2.3.1b Tax Deductions for Deferred Annuity Premiums

(a) Overview

It is a 2018-19 Financial Budget initiative to provide tax deductions for

deferred annuity premiums and Mandatory Provident Fund tax
deductible voluntary contributions (“TVCs”) to encourage the working
population to make early retirement savings in order to cope with the
financial risk arising from longevity. To implement this initiative, the
Inland Revenue and MPF Schemes Legislation (Tax Deductions for
Annuity Premiums and MPF Voluntary Contributions) (Amendment)
Bill 2018 was passed so that from the year of assessment 2019/20
onwards the premiums that a taxpayer pays for a qualifying deferred
annuity for himself and/or his spouse on or after 1 April 2019 are tax
deductible under salaries tax and tax under personal assessment. Apart
from deferred annuity premiums, such tax concession also applies to a
taxpayer’s TVCs made on or after that date.

The new Ordinance imposes a maximum tax deductible limit of

$60,000 per person per year. It is an aggregate limit for qualifying
deferred annuity premiums and TVCs, so that whether a taxpayer
makes TVCs of $60,000 or pays $60,000 of qualifying deferred
annuity premiums, or makes TVCs and purchases a qualifying
deferred annuity as well, the taxpayer may still claim tax deductions
up to $60,000 a year. Given the prevailing highest tax rate of 17%, the
maximum tax savings can reach $10,200 a year.

Based on the consideration that an annuity covering the taxpayer’s

spouse as a joint annuitant is a convenient retirement planning tool for
a married couple, a taxpaying couple are allowed to allocate tax
deductions for deferred annuity premiums amongst themselves in
order to claim the total deductions of $120,000 a year, provided that
the deduction claimed by any one of them does not exceed the
individual limit.

3
 To be tax deductible, deferred annuity premiums must be premiums
paid for a qualifying deferred annuity policy (“QDAP”), which is one
that satisfies the criteria specified in a Guideline issued by the
Insurance Authority (“IA”) and has been certified by the IA for this
purpose. A list of all QDAPs is maintained on the IA’s website
(www.ia.org.hk).

(b) Guideline on Qualifying Deferred Annuity Policy (GL19)

Taking effect on 1 April 2019, the Guideline on Qualifying Deferred

Annuity Policy (GL19) issued by the Insurance Authority sets out the
criteria which a deferred annuity policy has to satisfy in order to obtain
the necessary certification from the IA to become a QDAP, the process
for obtaining such certification and the ongoing requirements which
authorized insurers have to meet in respect of the promotion,
arrangement and administration of QDAPs. GL19 applies to all
insurers authorized to carry on long term business and involved in
developing, designing, underwriting and/or selling QDAPs.
The following is a summary of the criteria for QDAPs set out in GL19:
(i) Policy Features

(1) Minimum total premiums paid and minimum

premium payment period: With a minimum total
amount of $180,000, qualifying annuity premiums must
be payable for a minimum period of 5 years.

(2) Minimum annuity period: The annuity period is at least

10 years.

(3) Minimum frequency of annuity payments: The

annuity payments are made regularly and at least as
frequently as annually.

(4) Earliest annuitization: The annuity period starts when

the annuitant reaches age 50 at the earliest.

(5) Policy currency: While there is no restriction on policy

currency, the relevant risks (e.g. exchange rate risk)
should be clearly disclosed to potential policyholders in
the Product Brochure (“PB”). Exchange rates should be
adopted in a consistent manner, by following the rates
published on the website of the Inland Revenue
Department (“IRD”).

(6) No lapse gain: As far as possible, surrender values

should be so set as to prevent insurers from profiting
from an early termination of the policy.

4
(ii) Disclosure Requirements

(1) Disclosure of internal rate of return:

- The internal rate of return (“IRR”) is a useful

financial tool for appraising an investment plan that
involves a stream of incomes or outlays happening at
different points in time. The further a given amount
of income is from the start date of the plan, the lower
the IRR will be. On the contrary, the further a given
amount of outlay is from the start date of the plan, the
higher the IRR will be. By comparing the IRR of an
investment plan to its opportunity cost (see
Glossary) or other financial metrics, a decision is
made on whether or not to participate in the
investment plan.

- Although annuity should not be viewed as an

investment tool for pursuing a high return, with this
in mind the IRR may be taken as an evaluation tool,
perhaps alongside others, for comparing different
annuity policies or comparing an annuity product
with another type of financial product.

- GL19 requires that the IRR of the annuity policy

should be disclosed in the PB both in the form of
minimum to maximum IRRs for the guaranteed
portion (i.e. guaranteed IRRs) and total projected
benefit (i.e. total IRRs) respectively, and in the form
of an example of a non-smoking male aged 45 for
illustration.

- Personalized IRRs for the guaranteed IRR and total

IRR should be disclosed in the Benefit Illustration
(“BI”) at the point of sale. Disclosure of
personalized IRRs in the BI is currently optional, and
will be mandatory from 31 March 2020 onwards.

- GL19 specifies the formula that should be used to

calculate the IRR for the stream of monthly premium
contributions and monthly annuity payments.

- Some policies may allow the policyholders or

annuitants to leave the entire or part of the annuity
payments with the insurers so as to generate future
interest. GL19 requires that insurers should, in
calculating the IRR, assume that the policyholders or

5
 annuitants will choose to receive the annuity
payments in full as soon as they fall due. Any
reinvestment returns of the annuity payments payable
to the annuitant should be excluded from the
calculation of the IRR.

- For policies without a fixed policy term (e.g. a

lifetime policy), insurers should adopt 30 years as the
annuity period in calculating the IRR, and clearly
disclose the relevant assumption to potential
policyholders.

(2) Guaranteed annuity payments subject to minimum

percentages of total projected annuity payment:
Insurers should include a clear presentation in the BI of
the guaranteed annuity payments and non-guaranteed
annuity payments, if applicable. The guaranteed annuity
portion is subject to minimum percentages of the total
projected annuity payment according to a prescribed
table or scale.

(3) Clear separation of premiums of riders: Premiums

paid for riders do not constitute qualified annuity
premiums paid. Therefore they are not tax deductible
and should be deducted from the Annual Summaries of
QDAPs issued to policyholders. Where premiums for
embedded features (e.g. death benefits) are negligible in
amount and the cost of unbundling such premiums
would outweigh the benefit of disclosing them, insurers
may apply to the IA for a waiver of the requirement of
separation of premiums of riders.

(4) Risk disclosure – QDAPs: Insurers and licensed

insurance intermediaries should ensure that
policyholders or potential policyholders are fully
apprised of the policy features and risks associated with
QDAPs, and the relevant risks (e.g. the risk of significant
financial loss upon an early surrender of the policy) are
clearly and prominently disclosed in the PB.

(5) Additional risk disclosure - tax implications of

certification: In addition to the usual risk disclosure
applicable to all annuity policies, insurers and licensed
insurance intermediaries should remind policyholders or
potential policyholders that, even where a deferred
annuity policy is certified by the IA, it does not follow
that the premiums paid under that policy will

6
 automatically be tax deductible. The reason for this is
that there may be other tax related criteria (relating to the
personal circumstances of the policyholder, for example)
which need to be satisfied. Accordingly, certification by
the IA only indicates that the policy complies with the
criteria set out in GL19. The policyholder should be
reminded to refer to the website of the IRD or to contact
the IRD directly for any tax related enquiries.

(iii) Others

(1) Issuance of Annual Summary of QDAP: Insurers

should issue a separate Annual Summary of QDAP in
respect of each policy to the policyholder within 40 days
after the end of the year of assessment (i.e. 31 March), or
within a reasonable time after receiving a request from
the policyholder.

(2) Training of insurance intermediaries: Insurers are

reminded to provide insurance intermediaries with
sufficient training and ensure appropriate internal
controls are in place to prevent any mis-representation
and mis-selling of QDAPs.

(3) Record keeping: Authorized insurers should maintain

complete documentation and records to prove
compliance with the requirements of GL19, and make
them available to the IA upon request.

(4) Names of QDAPs: The name of a QDAP must clearly

indicate that it is a deferred annuity insurance policy. It
must also be clearly indicated in the PB of the QDAP
that the policy is certified by the IA as such.

(c) Guide for Using The Qualifying Deferred Annuity Policy Logo

According to the Guide for Using The Qualifying Deferred Annuity

Policy Logo issued by the IA, the logo for Qualifying Deferred
Annuity Policy - designed for easy identification of a QDAP by
members of the public - should be prominently displayed on the
product brochures of all QDAPs. Authorized insurers may display the
logo in marketing, promotion and advertising items of their QDAPs,
where appropriate. Use of the logo in relation to any other insurance
products (whether for marketing, promotion, advertising or otherwise)
or corporate brand marketing in general is strictly prohibited.

7
3. The following text is inserted immediately after Section 3.4 (c)(v):

3.4a VOLUNTARY HEALTH INSURANCE SCHEME

(a) Background

Fully launched, i.e. offered to consumers, on 1 April 2019, the

Voluntary Health Insurance Scheme (“VHIS”) is a policy initiative
implemented by the Food and Health Bureau (“FHB”) of the
Government to regulate individual indemnity hospital insurance
products, with voluntary participation by insurance companies and
consumers. Under the VHIS, the participating insurance companies can
offer indemnity hospital insurance plans (“IHIP”) that have been
certified by the FHB (“Certified Plans”) for individual consumers to
purchase voluntarily.

The VHIS is designed to bring certain benefits to consumers. By

enhancing the accessibility, quality and transparency of individual
hospital insurance, the VHIS provides an additional option for
consumers who are willing and can afford to pay more to use private
healthcare services.

(b) Tax Deduction under the VHIS

With the passage of the Inland Revenue (Amendment) (No. 4) Bill 2018
on 31 October 2018, taxpayers are now entitled to tax deductions under
salaries tax and personal assessment for qualifying premiums they pay
on or after 1 April 2019 for Certified Plans for themselves or any of
their “specified relatives” – defined to cover the taxpayer’s spouse and
children and the taxpayer’s or his/her spouse’s grandparents, parents
and siblings. The deduction ceiling is $8,000 per insured person per
year, irrespective of the number of policies that cover the insured
person. However, there is no cap on the number of specified relatives
who are eligible for tax deductions. For instance, if the taxpayer
purchases a total of four policies for four insured persons (e.g. the
taxpayer himself and three “specified relatives”) and the taxpayer is the
policyholder of these policies, then the annual deduction ceiling would
be $32,000 (i.e. $8,000 x 4) for the qualifying premiums paid.

(c) Administration of the VHIS

The VHIS is administered by the Voluntary Health Insurance Scheme

Office (“VHIS Office”) of the FHB. Insurance companies seeking to
offer VHIS-compliant products must first register as VHIS Providers
and, before their Standard Plans and Flexi Plans (if offered) are
marketed, each plan must have been successfully certified as a

8
Certified Plan (see (c)(iii) below for these three terms) by the FHB.
The FHB has set out the scheme rules in a set of scheme documents for
compliance by VHIS Providers:

(i) Registration Rules for Insurance Companies under the

Ambit of the Voluntary Health Insurance Scheme
(“Registration Rules”): Insurance companies must be
successfully registered with the FHB as VHIS Providers
according to the Registration Rules before they are allowed to
sell Certified Plans.

(ii) Voluntary Health Insurance Scheme Certified Plan Policy

Template (“Policy Template”): The Policy Template illustrates
the minimum requirements on the policy structure, terms and
benefits of Certified Plans, including Standard Plans and Flexi
Plans. Where a Certified Plan provides terms and benefits that
exceed the minimum requirements, the insurance policy
concerned may require additional, amended or supplementary
terms that the Policy Template does not stipulate. Where an
insurance policy covers not only a Certified Plan but also another
insurance plan (e.g. where a Certified Plan forms a rider to a life
insurance policy), the policy will contain terms and benefits that
the Policy Template does not stipulate, and these terms and
benefits will not be subject to the requirements of the VHIS.

(iii) Product Compliance Rules under the Ambit of the Voluntary

Health Insurance Scheme (“Product Compliance Rules”): The
Product Compliance Rules sets out the minimum product design
requirements for an insurance plan to be certified as VHIS-
compliant and the relevant product certification procedure. The
basic principles are set out below:

(1) An individual IHIP must be certified by the FHB before it

can be marketed as a Certified Plan.

(2) All Certified Plans must be individual IHIP. The

following are some examples that are not deemed to be
individual IHIP: group insurance plans with master policy
for employees; outpatient insurance plans; non-indemnity
insurance plans including hospital cash plans and critical
illness cash plans; and indemnity insurance plans that
cover specific illnesses (e.g. cancer) only.

(3) An individual IHIP can qualify as either type of Certified

Plans, namely a Standard Plan or a Flexi Plan, subject to
product compliance and prior certification by the FHB.

9
 (4) The product design of a Standard Plan is basically fixed,
save for minor allowable variations. It must offer terms
and benefits equivalent to the minimum requirements of
Certified Plans under the VHIS, namely Basic Benefits,
as prescribed in the Policy Template (see (c)(ii) above).

(5) A Flexi Plan must provide Enhanced Benefits in

addition to the Basic Benefits. The design of Flexi Plans
must adhere to the “better-off principle” entailing terms
and benefits which will bring more protection to
customers when compared with a Standard Plan while
policyholders’ entitlement to the Basic Benefits would
not be adversely affected, save for specified exceptions.

(6) Both Standard Plan and Flexi Plan may encompass a

minor element of benefits other than Basic Benefits and
Enhanced Benefits, namely Other Benefits. Other
Benefits are allowed to form part of a Certified Plan to
cater for the licensing requirement for long-term insurers
to provide long-term insurance benefits (e.g. life
insurance) in the individual IHIP they offer.

(7) The table below illustrates the principles in defining

Standard Plan and Flexi Plans:

Standard Plan Flexi Plan

Basic Benefits Must include Must include
Enhanced Benefits Must not include Must include
Other Benefits Optional Optional

(8) An insurance policy issued under a Certified Plan may

attach or be attached to other insurance plans (e.g. a
Certified Plan serves as a rider attached to a life insurance
policy). However, such other insurance plan(s) will not be
considered as part of the Certified Plan, and the policy
terms and conditions must not contradict with the
objectives of the VHIS and must not reduce the protection
of the Certified Plan to the policyholders under the same
policy.

(iv) Code of Practice for Insurance Companies under the Ambit

of the Voluntary Health Insurance Scheme (“Code of
Practice”): The Code of Practice sets out the required conduct
and practices covering product offering, migration arrangement,
sales and marketing, handling of application, cooling-off period,
after-sales services, etc. for VHIS Providers to comply with so as

10
to supplement the Policy Template. It is particularly important
for insurance intermediaries to get familiar with the requirements
of the Code of Practice on “sales and marketing”, which are
summarised below:

(1) In conducting sales and marketing activities, VHIS

Providers should provide clear, accurate, non-misleading
and easily accessible information of the VHIS and
Certified Plans to consumers for them to make informed
choices.

(2) VHIS Providers should ensure that all sales and

marketing materials are accurate and in a non-
misleading manner, in Chinese and English (except for
social media and advertisements), in plain language and
complete.

(3) VHIS Providers should ensure consumers, policyholders

and insured persons can easily distinguish terms and
benefits under Certified Plans from non-VHIS products
across all sales and marketing materials.

(4) In the course of marketing Certified Plans, VHIS

Providers and their sales representatives should disclose
and exercise due diligence in explaining the key product
and premium information of Certified Plans to
consumers.

(5) VHIS Providers should provide an easy access to

essential information (such as company website,
communications with sales/service representatives,
enquiry hotline, etc.) so that consumers can easily enquire
about the information on the VHIS and the Certified
Plans, e.g. their registration status as a VHIS Provider;
product and premium information of the Certified Plans
on offer; underwriting factors, material facts and
information of consumers for underwriting purposes;
eligibility for tax deduction; complaint handling
procedures.

(6) VHIS Providers should inform applicants of their

obligations to disclose personal information and
material facts for underwriting, and the possible
consequences of material non-disclosure,
misrepresentation and fraud.

11
(7) Where VHIS Providers stipulate in the VHIS Certified
Plan Policy Template that they may withhold part of
premium refund for reasonable administration charges,
they should explain the relevant practices and calculation
to the applicants upfront.

(8) VHIS Providers should explain to applicants for Certified

Plans the cooling-off right (see (d)(vii)(4) below) that
policyholders will have during the cooling-off periods
prescribed in the policies.

(9) In the case of a Standard Plan, VHIS Providers should

explain to consumers during the selling process and upon
enquiry that all benefits described in the Standard Plan
are applicable worldwide except for psychiatric
treatments. With Flexi Plans subject to restrictions in
territorial scope of cover, they should instead explain the
definition of regions with restrictions and the benefit
adjustment rules, and that the reduction is inapplicable to
the Basic Benefits of the Flexi Plans, i.e. the coverage
equivalent to the Standard Plan.

(10) In the case of a Standard Plan, VHIS Providers should

explain to consumers during the selling process and upon
enquiry that all benefits described in the Standard Plan
are not subject to any restriction in the choice of
healthcare services providers. With Flexi Plans subject
to restrictions in the choice of healthcare services
providers, they should instead explain the list of selected
healthcare services providers, and that the restrictions are
inapplicable to the Basic Benefits of the Flexi Plans, i.e.
the coverage equivalent to the Standard Plan.

(11) In the case of a Standard Plan, VHIS Providers should

explain to consumers during the selling process and upon
enquiry that all benefits described in the Standard Plan
are not subject to any restriction in the choice of ward
class. With Flexi Plans subject to restrictions in the
choice of ward class, they should instead explain the
targeted ward class and the details of benefit adjustment
upon voluntary choice of higher ward classes, and that the
insurance company will guarantee that such benefit
adjustment will not apply in the event of involuntary ward
upgrade, or to the Basic Benefits of the Flexi Plans (i.e.
the coverage equivalent to the Standard Plan) in the
event of voluntary ward upgrade.

12
 (12) VHIS Providers should explain to consumers during the
selling process and upon enquiry the coinsurance
arrangement of prescribed diagnostic imaging tests under
the Standard Plan, and the coinsurance and deductible
arrangements approved by the FHB for eligible Flexi
Plans, if any.

(13) Subject to the rules on tax deductions promulgated by the

Government, VHIS Providers should, in the selling
process and upon enquiry, inform consumers of the
eligibility of Certified Plans for claiming tax deductions.

It is worth noting that the IA will issue a guideline on medical

insurance business to be applicable to all medical insurance business,
including the VHIS. The guideline will provide guidance on the
expected standard and practices to ensure fair treatment of customers.

(d) Fundamental Features of the VHIS

The VHIS is equipped with the following features in order for it to

function effectively:

(i) Insured Persons under the VHIS must be Hong Kong residents
(including holders of Hong Kong Identity Card) aged between 15
days and 80 years.

(ii) There are two types of Certified Plans: Standard Plan and
Flexi Plan. The Standard Plan provides standardised basic
coverage according to the minimum requirements of the VHIS,
whereas the Flexi Plan provides enhanced coverage while
generally preserving all the coverage provided by the Standard
Plan. Examples of Flexi Plan enhanced coverage include higher
benefit amounts and a choice of products that suit different
consumers’ needs.

(iii) Setting of premiums is virtually unfettered. In line with the free

market principle, VHIS Providers are free to set their own
premium levels. By common market practice, Certified Plans
may charge standard premiums that differ by age and gender,
and adjust the overall premium level annually according to
factors like medical inflation and revisions of benefit amounts.
In order to enhance market transparency and promote price
competition, it is a requirement that VHIS Providers publish age-
banded premium schedules for their Certified Plans.

13
(iv) It is not mandatory for VHIS Providers to accept any
applications. They may underwrite the insured persons to assess
their risks, and decide whether to accept the applications
unconditionally, accept the applications with premium loading
and/or case-based exclusions, or reject the applications. They
are required to explain their underwriting decisions and
application results to the applicants concerned and, upon the
applicants’ request, provide written notice for such explanations.

(v) Certified Plans’ coverage is not restricted to charges of private

hospitals. Insured Persons may claim reimbursement of
healthcare expenses incurred in healthcare institutions,
whether public or private. Besides, purchases of Certified
Plans will not affect Insured Persons’ entitlement to use public
healthcare services.

(vi) Upon successful registration as VHIS Providers, insurance

companies must provide their existing policyholders of
individual hospital insurance with an opportunity to switch (or
“migrate”) to Certified Plans.

(vii) Compared with many existing indemnity hospital insurance

products, Certified Plans are more attractive in a number of
ways, as reflected by the following product features of both the
Standard Plan and the basic coverage of the Flexi Plan:

(1) The policy terms and conditions, benefit coverage and

benefit amounts are standardized.

(2) Premium transparency is enhanced by easy access to the

standard premium schedule by age, gender and other
factors of each Certified Plan on the VHIS website and
the websites of VHIS providers. Upon policy renewal, a
VHIS Provider may adjust the standard premium for a
VHIS policy according to the prevailing standard
premium schedule adopted by it on an overall portfolio
basis. During each policy year and upon renewal, no
additional rate or amount of premium loading or case-
based exclusion(s) on the insured person may be imposed
by reason of any change in the insured person's health
condition.

(3) The insured is guaranteed a right of renewal up to the age

of 100. Moreover, there is no “lifetime benefit limit” -
the maximum amount of benefits that a medical insurance
policy says it will pay cumulatively during the lifetime of
the insured person.

14
(4) The policyholder has the right (“cooling-off right”) to
cancel a newly effected policy during the 21-day period
(or a longer period offered by the VHIS providers) after
the delivery of the policy to the policyholder or to the
policyholder’s representative or the issuance of notice of
policy availability to the policyholder or to the
policyholder’s representative, whichever is the earlier,
with full refund of the premiums paid provided no benefit
payment has been made or is to be made or impending.

(5) Coverage is extended to include:

- Unknown pre-existing conditions - Pre-existing

conditions not known at the time of joining are
partially covered during a waiting period of 3 years
upon policy inception (i.e. no coverage in the 1st
policy year, 25% reimbursement in the 2nd policy year
and 50% in the 3rd policy year) and fully covered from
the 4th policy year onwards.

- Treatment of congenital conditions – Investigation

and treatment of congenital conditions which have
manifested or been diagnosed after the age of 8 is
covered, subject to the same reimbursement
arrangement that applies to unknown pre-existing
conditions.

- Day case procedures – Surgical procedures

(including endoscopy) not conducted in hospital are
covered, subject to such provisos as “medical
necessity”.

- Prescribed advanced diagnostic imaging tests –

Computed Tomography (“CT scan”), Magnetic
Resonance Imaging (“MRI scan”) and Positron
Emission Tomography (“PET scan”) not conducted in
hospital are covered, subject to 30% coinsurance.

- Prescribed non-surgical cancer treatments –

Chemotherapy, radiotherapy, targeted therapy,
immunotherapy and hormonal therapy for cancer
treatments are covered.

- Psychiatric treatments – Psychiatric treatments

during confinement in Hong Kong as recommended
by a specialist are covered.

15
4. The following entries are added to the Glossary:

Case-based Exclusion(s) （ 個 別 不 保 項 目 ） Defined in the Code of Practice for

Insurance Companies under the Ambit of the Voluntary Health Insurance Scheme as
“The exclusion of a particular sickness or disease from the coverage of Certified Plan that
may be applied by the Company based on a Pre-existing Condition or factors affecting the
insurability of the Insured Person.” 3.4a(d)(iv)

Certified Plans （ 認 可 產 品 ） Defined in the Code of Practice for Insurance

Companies under the Ambit of the Voluntary Health Insurance Scheme as “Individual
IHIP [indemnity hospital insurance plans] certified by FHB [the Food and Health Bureau] as
VHIS[Voluntary Health Insurance Scheme]-compliant, including the Standard Plan and
Flexi Plans.” 3.4a(a)

Coinsurance (Medical Insurance Policy) （共同保險（醫療保險單）） Defined in the

Code of Practice for Insurance Companies under the Ambit of the Voluntary Health
Insurance Scheme as “A percentage of eligible expenses the Policy Holder must contribute
after paying the Deductible (if any) in a Policy Year. For the avoidance of doubt,
Coinsurance does not refer to any amount that the PolicyHolder is required to pay if the
actual expenses exceed the benefit limits of the Certified Plan.” 3.4a(c)(iv)(12)

Cooling-off Period （冷靜期） Among the standardised provisions of Certified Plans

under the Voluntary Health Insurance Scheme (“VHIS”) is one that grants policyholders the
right to cancel their newly effected policies within the relevant cooling-off periods with full
refund of the premiums paid provided no benefit payment has been made or is to be made or
impending. The cooling-off period lasts for 21 days (or a longer period offered by the VHIS
providers) after the delivery of policy or the issuance of notice to the policyholder or the
policyholder’s representative stating that the policy is available and when the cooling-off
period would expire, whichever is the earlier. 3.4a(d)(vii)(4)

16
Flexi Plan （靈活計劃） Defined in the Code of Practice for Insurance Companies
under the Ambit of the Voluntary Health Insurance Scheme as “Any individual IHIP
[indemnity hospital insurance plans] under the VHIS [Voluntary Health Insurance Scheme]
framework with enhancement(s) to any or all of the protections or terms and benefits that the
Standard Plan provides to the Policy Holder and the Insured Person, subject to the
certification by FHB [the Food and Health Bureau]. Such plan shall not contain terms and
benefits which are less favourable than those in the Standard Plan, save for the exception as
may be approved by FHB from time to time.” 3.4a(c)(iii)(5)

Internal Rate of Return (IRR)（內部回報率） A useful financial tool for appraising

investment plans. An investment plan is often appraised by comparing its expected return to
its Opportunity Cost. But the calculation of the expected return would become complicated
if the investment plan involves a stream of incomes or outlays happening at different points
in time as opposed to a single income and outlay. In such circumstances, it makes sense to
calculate the investment plan’s IRR by taking into account the different amounts of cash
involved and the time they are paid or received, and then compare the IRR to the opportunity
cost or other financial metrics. 2.3.1b(b)(ii)(1)

Opportunity Cost （機會成本）The Opportunity Cost of an investment plan is the value

of the most valuable of all alternatives to that investment plan. 2.3.1b(b)(ii)(1)

Qualifying Deferred Annuity Policy (QDAP)（合資格延期年金保單） Premiums paid

under a deferred annuity policy are tax deductible, provided that the policy constitutes a
Qualifying Deferred Annuity Policy, which is one that satisfies the criteria specified in the
Guideline on Qualifying Deferred Annuity Policy (GL19) issued by the Insurance
Authority (“IA”) and has been certified by the IA for this purpose. 2.3.1b(a)

Standard Plan （ 標 準 計 劃 ） Defined in the Code of Practice for Insurance

Companies under the Ambit of the Voluntary Health Insurance Scheme as “The
insurance plan with terms and benefits equivalent to the minimum compliant product
requirements of the VHIS [Voluntary Health Insurance Scheme], which are from time to
time published and subject to regular review by the Government.” 3.4a(c)(iii)(4)

17
5. The following entries are added to the Index:

Case-based Exclusion(s) 個別不保項目 3.4a(d)(iv)

Certified Plans 認可產品 3.4a(a)
Code of Practice for Insurance Companies 《自願醫保計劃下保險 3.4a(c)(iv)
under the Ambit of the Voluntary Health 公司的實務守則》
Insurance Scheme
Coinsurance (Medical Insurance Policy) 共同保險（醫療保險 3.4a(c)(iv)(12)
單）
Cooling-off Period 冷靜期 3.4a(d)(vii)(4)
Flexi Plan 靈活計劃 3.4a(c)(iii)(5)
Guide for Using The Qualifying Deferred 使用合資格延期年金保 2.3.1b(c)
Annuity Policy Logo 單標誌指南
Guideline on Qualifying Deferred 《合資格延期年金保單 2.3.1b(b)
Annuity Policy (GL19) 指引》（指引19）
HKMC Annuity Plan 香港年金計劃 2.3.1a(a)
Indemnity Hospital Insurance Plan 償款住院保險產品 3.4a(a)
Internal rate of return 內部回報率 2.3.1b(b)(ii)(1)
Opportunity cost 機會成本 2.3.1b(b)(ii)(1)
Product Compliance Rules under the 《自願醫保計劃下產品 3.4a(c)(iii)
Ambit of the Voluntary Health Insurance 的合規規則》
Scheme
Qualifying Deferred Annuity Policy 合資格延期年金保單 2.3.1b(a)
(QDAP)
Registration Rules for Insurance 《自願醫保計劃下保險 3.4a(c)(i)
Companies under the Ambit of the 公司的註冊規則》
Voluntary Health Insurance Scheme
Standard Plan 標準計劃 3.4a(c)(iii)(4)
Voluntary Health Insurance Scheme 自願醫保計劃 3.4a
Voluntary Health Insurance Scheme 《自願醫保計劃認可產 3.4a(c)(ii)
Certified Plan Policy Template 品保單範本》

18
6. For ease of reference, textual updates to the rest of the Study Notes are set out
below:

Existing Wording Updated Wording Sections

Deferred annuity: Deferred annuity: can be purchased with a 2.3.1(b)
the annuity benefit single premium or with premiums paid in
payments begin at instalments. The annuity benefit payments
some specified time begin at some specified time or specified
or specified age of the age of the annuitant, rather than
annuitant, rather than immediately. A deferred annuity policy has
immediately. an accumulation phase and an annuitization
phase. During the accumulation phase,
the policyholder pays premiums regularly
over a period of time which is usually
followed by a deferral period to allow the
paid up sum to grow through investment by
the insurers. At the completion of the
accumulation phase, the deferred annuity
insurance policy will annuitize, the
annuitization phase will begin and the
annuitant will receive regular payments
during the annuity period.

Insurance Authority
August 2019

19
 Study Notes for Long Term Insurance Examination
Update

Renaming of The Insurance Claims Complaints Bureau

The Insurance Claims Complaints Bureau (‘ICCB’) has been renamed The
Insurance Complaints Bureau (‘ICB’) with effect from 16 January 2018.

This Update serves to set out the textual updates to the Study Notes for the Long
Term Insurance Examination (2017 Edition) to reflect the aforesaid change.

Existing Wording Updated Wording Sections

They being decided cases of They being decided cases of Preface
the Insurance Claims the Insurance Claims
Complaints Bureau (ICCB), Complaints Bureau (ICCB),
it is worth noting that the which has been renamed the
Insurance Claims Complaints Insurance Complaints
Panel of the ICCB is Bureau (ICB) with effect from
empowered by the Articles of16 January 2018, it is worth
Association of the ICCB to noting that the Insurance
look beyond the strict Claims Complaints Panel of
interpretation of policy terms
the then ICCB/ICB was/is
in making a ruling. empowered by its Articles of
Association to look beyond
the strict interpretation of
policy terms in making a
ruling.
Insurance Claims Complaints then Insurance Claims Section 1.2.2
Bureau Complaints Bureau – which (Case 1)
has been renamed the
Insurance Complaints Bureau
in 2018 –

Insurance Authority
August 2018

1
 PREFACE
These Study Notes have been prepared to correspond with the various
Chapters in the Syllabus for the Long Term Insurance Examination. The
Examination will be based upon these Notes. A few representative examination
questions are included at the end of each Chapter to provide you with further
guidance.

Immediately following the descriptions of some aspects of the practice of

long term insurance, you will find actual cases of long term insurance claims,
which are there mainly to facilitate your understanding of the subject and to
make your learning more interesting. The decisions you will find in those cases
were based on their particular facts, including the actual wording used in the
insurance policies in question. They being decided cases of the Insurance
Claims Complaints Bureau (ICCB), it is worth noting that the Insurance Claims
Complaints Panel of the ICCB is empowered by the Articles of Association of
the ICCB to look beyond the strict interpretation of policy terms in making a
ruling. In addition, as far as good insurance practice is concerned, the
Insurance Claims Complaints Panel relies heavily on the expected standards
set out in The Code of Conduct for Insurers, with particular reference to “Part
III: Claims”.

It should be noted, however, that these Study Notes will not make you a
fully qualified underwriter or other insurance specialist. It is intended to give a
preliminary introduction to the subject of Long Term Insurance, as a Quality
Assurance exercise for Insurance Intermediaries.

We hope that the Study Notes can serve as reliable reference materials
for candidates preparing for the Examination. While every care has been taken
in the preparation of the Study Notes, errors or omissions may still be
inevitable. You may therefore wish to make reference to the relevant legislation
or seek professional advice if necessary. As further editions will be published
from time to time to update and improve the contents of these Study Notes, we
would appreciate your feedback, which will be taken into consideration when
we prepare the next edition of the Study Notes.

First Edition: August 1999

Second Edition: June 2001
Third Edition: January 2005
Fourth Edition: June 2007
Fifth Edition: June 2011
Sixth Edition: December 2016
Seventh Edition: August 2017

 Insurance Authority 1999, 2001, 2005, 2007, 2011, 2016, 2017

Please note that no part of the Study Notes may be reproduced for the purposes of selling or making profit without
the prior permission of the Insurance Authority.

i
 TABLE OF CONTENTS
Chapter Page
1. INTRODUCTION TO LIFE INSURANCE 1/1
1.1 Definition of Life Insurance 1/1
1.1.1 Needs for Life Insurance
1.2 Principles of Life Insurance 1/2
1.2.1 Insurable Interest
1.2.2 Duty of Disclosure
1.2.3 Other Insurance Principles
1.3 Calculation of Life Insurance Premium 1/10
1.3.1 Rating Factors
a. Mortality, Interest and Expenses
b. Other Factors
1.3.2 Pricing Systems
a. Natural Premium (Pricing) System
b. Level Premium (Pricing) System

2. TYPES OF LIFE INSURANCE AND ANNUITY 2/1

2.1 Traditional Types of Life Insurance 2/2
2.1.1 Term Insurance
a. Level/Decreasing/Increasing Term Insurance
b. Renewable/Convertible Term Insurance
2.1.2 Endowment Insurance
2.1.3 Whole Life Insurance
2.2 Non-Traditional Types of Life Insurance 2/6
2.2.1 Universal Life Insurance
2.2.2 Unit-Linked Long Term Insurance
2.3 Annuities and Pensions 2/9
2.3.1 Annuities
2.3.2 Pensions
2.4 Group and Individual Insurance Plans 2/10

ii
3. BENEFIT RIDERS AND OTHER PRODUCTS 3/1
3.1 Disability Benefits 3/1
3.1.1 Disability Waiver of Premium
3.1.2 Disability Income
3.2 Accident Benefits 3/4
3.2.1 Accidental Death and Dismemberment
3.2.2 Other Accident Benefits
3.3 Accelerated Death Benefits 3/6
3.3.1 Critical Illness Benefit
3.3.2 Long-Term Care (LTC) Benefit
3.4 Medical Benefits 3/9
3.5 Insurability Benefits 3/10
3.5.1 Guaranteed Insurability Option
3.6 Inflationary Adjustment 3/11
3.6.1 Cost of Living Adjustment (COLA) Benefit

4. EXPLAINING THE LIFE INSURANCE POLICY 4/1

4.1 Entire Contract Provision 4/1
4.2 Incontestability Provision 4/1
4.3 Grace Period 4/3
4.4 Beneficiary Designation 4/4
4.5 Nonforfeiture Benefits 4/5
4.6 Policy Loan 4/6
4.7 Reinstatement 4/6
4.8 Misstatement of Age or Sex 4/7
4.9 Assignment 4/8
4.10 Dividend Options 4/9
4.11 Settlement Options 4/10
4.12 Suicide Exclusion 4/10

iii
5. LIFE INSURANCE PROCEDURES 5/1
5.1 Company Operation 5/1
5.1.1 Typical Company Operational Structure
5.2 Application 5/4
5.2.1 Application Procedure
5.2.2 Receipts and Policy Effectiveness
5.2.3 Client Service - Policies and Standards
a. The Importance of Client Service
b. How to Achieve Quality Client Service
5.2.4 Cooling-Off Period
5.2.5 Policy Switching
5.2.6 Sales Illustrations for Linked and Non-Linked
Policies
a. Linked Policy Illustration Document
b. Standard Illustration for Universal Life (Non-
Linked) Policies
c. Standard Illustration for Participating Policies
5.2.7 Distributions of Policy Dividends
a. Basic Principles of Dividend Distributions
b. Methods of Dividend Distributions
c. Advantages of Participating Policies
d. Transparency of Life Insurers with regard to
Dividends
5.2.8 Guideline on Underwriting Long Term Insurance
Business (Other Than Class C Business) (GL16)
5.2.9 Initiative on Financial Needs Analysis
5.2.10 Important Facts Statement for Mainland Policyholder
5.2.11 Relevant Guidelines by Approved Bodies of
Insurance Brokers

iv
 5.3 Underwriting 5/36
5.3.1 Underwriting Factors
5.3.2 Medical Reports
5.3.3 Sub-Standard Life and Underwriting Measures
5.4 Policy Issuance 5/40
5.4.1 Policy Delivery
5.5 After Sales Service 5/41
5.5.1 Policy Changes
5.6 Claims 5/42
5.6.1 Maturity Claims
5.6.2 Death Claims
5.6.3 Surrenders
APPENDICES
A. Customer Protection Declaration Form and Explanatory Notes to 6/1
Customer Protection Declaration Form
B. Information to be disclosed in the Illustration Document for 6/7
Investment-Linked Policies
C. Standard Illustration for Universal Life (Non-Linked) Policies 6/10
D. Standard Illustration for Participating Policies 6/16
E. Guideline on Underwriting Long Term Insurance Business 6/21
(Other Than Class C Business) (GL16)
F. Initiative on Financial Needs Analysis 6/47
G. Important Facts Statement for Mainland Policyholder 6/52
(Only Chinese version available)
H. Guidance Note on Conducting “Know Your Client” Procedures 6/56
for Long Term Insurance Business (CIB-GN(4))

I. Guidance Note on Product Recommendation for Long Term 6/59

Insurance Business (CIB-GN(12))

GLOSSARY (i) – (xviii)

INDEX (1) - (7)

ANSWERS TO REPRESENTATIVE EXAMINATION QUESTIONS

-o-o-o-

v
 NOTE

If you are taking this Subject in the Insurance Intermediaries Qualifying

Examination, you will also be required, unless exempted, to take the Subject "Principles
and Practice of Insurance". Whilst the examination regulations do not require you to
take that Subject first, it obviously makes sense to do so. That Subject lays a foundation
for further studies and many of the terms and concepts found in that Subject will be
assumed knowledge with this Subject.

For your study purposes, it is important to be aware of the relative “Weight” of

the various Chapters in relation to the Examination. All Chapters should be studied
carefully, but the following table indicates areas of particular importance:

Chapter Relative Weight

1 10%

2 20%

3 24%

4 24%

5 22%

Total 100%

vi
1 INTRODUCTION TO LIFE INSURANCE

1.1 DEFINITION OF LIFE INSURANCE

In the first of an excellent series of textbooks produced by the U.S. Life Office
Management Association Inc. (LOMA), life insurance (or ‘life assurance’ in British
terminology) is defined as follows:

"Life insurance provides a sum of money if the person who is insured dies
whilst the policy is in effect."

Anybody who has some knowledge about life insurance will be tempted to say
"Yes, BUT.....". In other words, surely this is too brief an explanation for a financial
service that provides a very sophisticated range of savings and investment products, as
well as mere compensation for death. Nevertheless, this is apt for the first chapter on
life insurance for beginners.

The definition captures the original, basic intention of life insurance: i.e. to
provide for one's family and perhaps others in the event of death, especially premature
death (i.e. death occurring at such a time that financial hardship will likely be caused
to the dependants). Originally, policies were for short periods of time, covering
temporary risk situations, such as sea voyages. As life insurance became more
established, it was realised what a useful tool it was for a number of situations, which
would include:

(a) Temporary needs/threats: the original purpose of life insurance remains an

important element in life insurance and estate planning, as things like children's
education, etc. occupy responsible people's thoughts.

(b) Savings: providing for one's family and oneself, as a long-term exercise,
becomes more and more relevant as society evolves from a tribal, clan, family
orientated community to relatively affluent individual independence.

(c) Investment: can be defined as a process of purchasing an asset, with an

expectation that it will in the future provide an income or appreciate. The
accumulation of wealth and safeguarding it from the ravages of inflation
become realistic goals as living standards rise.

(d) Retirement: provision for one's own later years becomes increasingly necessary,
especially in a changing cultural and social environment.

So our purpose, as we begin this study, is not so much to remember certain

facts, but rather to understand something of the fundamentals of long term insurance,
and to appreciate its role in modern society.

1/1
 1.1.1 Needs for Life Insurance

Whilst 1.1 above outlines the developing appreciation of the many uses
of life insurance, the modern scene tends to look upon available life insurance
products from the perspective of meeting various needs. These we may think of
as:

(a) Personal needs:

(i) dependants’ living expenses;

(ii) final (end of life) expenses;

(iii) educational funds;

(iv) retirement income;

(v) mortgage repayment fund;

(vi) emergencies fund (usually needed to meet unexpected expenses);

(vii) disability income.

(b) Business needs:

(i) key persons;

(ii) business owners;

(iii) partnerships;

(iv) employee benefits.

1.2 PRINCIPLES OF LIFE INSURANCE

In the Core Subject for this Insurance Intermediaries Quality Assurance

Scheme, "Principles and Practice of Insurance", the principles of insurance were
studied in detail. By way of reminder, but not detailed comment at this stage, these
principles are:

(a) Insurable Interest: the legal right to insure;

(b) Utmost Good Faith: a duty to reveal material information actively;

(c) Proximate Cause: determining the effective cause of a loss in the context of
insurance claims;

(d) Indemnity: the insurer providing an exact financial compensation;

1/2
(e) Contribution: insurers sharing an indemnity payment;

(f) Subrogation: the indemnifying insurer taking over and then exercising the
insured’s rights of recovery against third parties.

1.2.1 Insurable Interest

In simple terms, insurable interest is such relationship with the subject

matter of insurance (a person’s life, in the case of life insurance) that is
recognised at law or in equity as giving rise to a right to insure that person’s
life. This is a concept that has applied for two and a half centuries in England
and is obviously based on common sense. If you have no relationship with a
given person, why should you have the right to insure his life and thus gain
from his death? Some particular points to be noted with this principle are:

(a) Statutory requirement: in life insurance, the requirement for an

insurable interest is derived from section 64B of the Insurance
Ordinance.

(b) Effect of lack of insurable interest: Section 64B renders a contract of

life insurance void where the person for whose use or benefit or on
whose account it is made has no interest.

(c) Insurable interest in oneself and in spouse: it is judicially presumed

that we all have an insurable interest in our own lives for an unlimited
amount, and that any one person has an insurable interest for an
unlimited amount in the life of his or her spouse, so that no proof of such
an interest is required.

(d) Insurable interest in others: with the exceptions of insurable interests

founded on judicial presumptions (see (c) above) or statute (see (f)
below), as case law reveals, there must be an interest which is capable of
valuation in money. Some examples which may be reasonably common
are:

(i) debtors: if a person owes you money, you may insure his life for
the amount of the loan, plus accrued interests;

(ii) business partners: especially where personal services are

involved, such as performers and musicians;

(iii) contractual relationships: if another person's services have been

engaged under contract (booking a singer for a concert, a
professional sportsperson, etc.), that person's death may cause the
other contracting party to suffer financially. That potential loss is
insurable.

Note: This heading would include a type of life insurance known

as Key Person Life Insurance (or Key Employee Life Insurance),
where an employer insures the life of an important employee, in
case of loss to the business from the employee's death.

1/3
(e) Blood relationships and family members: in some countries (e.g. in
most jurisdictions of the U.S.), a family relationship prescribed by the
relevant law (brother, sister, parent, child, grandparent, grandchild, etc.)
is sufficient to constitute an insurable interest.

(f) Statutory extension of insurable interest: in Hong Kong, by virtue of

Section 64A of the Insurance Ordinance, a parent or guardian of a minor
(i.e. a person aged under 18) is given an insurable interest in that young
person. It means that, apart from one’s spouse, only the relationships
just mentioned constitute an insurable interest arising from blood or
family connection. An insurance effected on the basis of any other blood
or family relationship is technically void (see (b) above).

(g) Sections 64C and 64D of the Insurance Ordinance: these Sections
have two other important provisions:

(i) the person interested in the life insured, or for whose use or benefit
or on whose account the contract is entered into, must be named in
the contract;

(In practice, this provision is not construed so widely as to include

all those who the policyowner intends to benefit by receiving the
policy proceeds. Therefore, where a life insurance policy is
payable to the executors of the policyowner, no one cares whether
the names of the executors and of the persons who are intended to
benefit under the will appear in the policy.)

(ii) no more than the amount of the interest the insured (i.e.
policyowner) has in the life insured is recoverable under the
contract [this provision is significant only where the life insurance
concerned is effected on an indemnity basis, credit life insurance
being an example (see 2.1.1a(b)(i))].

(h) When is the interest needed?: this is a key question, and very important
consequences flow from its answer. The answer is that an insurable
interest is only needed when the contract begins, and becomes irrelevant
thereafter. What could be the (quite legal) consequences of this? Some
examples are:

(i) Divorce: a spouse, who insures his/her spouse and then becomes
divorced, can keep the policy in force and be perfectly entitled to
collect the benefit in due time.

(ii) Debts: it is legally possible to insure your debtor’s life, have the
debt repaid, keep the policy in force, and be "paid again" in due
time by the insurer.

(iii) Assignment: a policyowner is capable of assigning a properly

arranged life insurance contract to a third party even though the

1/4
 latter has no insurable interest in the life insured, provided that
this is not a premeditated act of getting round the requirement for
an insurable interest. The latter act will be ineffective on the
grounds that it is done for the purpose of defeating the object of a
statute, and the contract is indeed void as from inception because
the de facto insured (i.e. the intended assignee) has not the
required insurable interest. Therefore, what matters is the
intention of the policyowner when he is effecting a life policy.
Taking out a life policy with the general intention of assigning it
is legitimate, but doing so with the intention of assigning it to a
specific person who has no insurable interest in the life insured is
another matter.

1.2.2 Duty of Disclosure

This concerns another important insurance principle, that of utmost

good faith. Put simply, utmost good faith requires the applicant to disclose all
material facts, whether the insurer requests them or not. A material fact is
legally defined as ‘every circumstance which would influence the judgment of a
prudent insurer in fixing the premium, or determining whether he will accept
the risk’. Some points to note:

(a) What to disclose: clearly, the insurer wishes to know all important facts,
but you cannot be expected to disclose what you reasonably cannot be
expected to know. Some conditions, for example, may be easily
recognisable to qualified doctors, but the average layman cannot be
expected to self-diagnose and reveal such things.

Case 1 At law insurance applicants are required to disclose material

facts to the insurers

Operating a trading firm in the Guangdong Province, the policyowner

effected a life insurance policy. He suffered from recurrent fever three
months later for over two months, and finally died of cancer. From the
medical report of a hospital on the Mainland, the insurer noted that the
deceased had complained of tiredness and lack of strength the year before.
On the other hand, it also noted that when he was asked in the application
form if he had in the past three months experienced or sustained symptoms of
tiredness for more than a week, he replied "no". The insurer therefore
rejected the claim on account of a material non-disclosure.

The Insurance Claims Complaints Panel (or the “Complaints Panel”) of the
Insurance Claims Complaints Bureau felt that it was uncommon for an
insurer to ask in an application form whether the applicant had in the past
three months experienced or sustained symptoms of tiredness for more than a
week. It considered that the policyowner's non-disclosure of his symptoms of
"tiredness and lack of strength over a year" was not material enough for the
insurer to reject the claim.

1/5
Remarks : Apparently the Complaints Panel’s decision was based on the
rules that (1) an insurance applicant is only required to disclose material
facts, rather than any facts he is being asked about, and that (2) the scope of
“material facts” is restricted by an objective test so that those facts which
only a particular insurer deems to be material are not actually material
enough to enable this insurer to rely on the principle of utmost good faith.

Case 2 At law insurance applicants are required to actively disclose to

the insurers material facts he knows or should know

The policyowner was diagnosed as suffering from carcinoma of colon nine

months after he had taken out a policy. His claims for critical illness benefit
and waiver of premium benefit were rejected by the insurer on the grounds
that he had not disclosed on the application form the medical history of his
obstructive sleep apnoea.

It was noted from the medical report that the policyowner had consulted a
doctor for heavy snoring and was first diagnosed as having obstructive sleep
apnoea in a sleep study 12 years before his insurance application. He had five
follow-up consultations in the following year. Continuous positive airway
pressure therapy was recommended which he declined. Since then he
defaulted follow-up consultation. He was referred to have sleep study
assessment again, one year before the insurance application. It was revealed
that the symptoms of snoring and excessive daytime sleepiness had not gone
away. Further sleep study was arranged but he did not return for follow up.

The policyowner admitted that he had suffered from obstructive sleep apnoea
for a long time, but pointed out that such symptoms were in no way related to
his colon cancer. He also emphasised that the symptoms had not affected his
work as a bus driver for 20 years and he had passed the annual body check
provided by the bus company.

The Complaints Panel learnt from the insurer's underwriting manual that the
severity of an applicant's obstructive sleep apnoea and the co-existence of
associated diseases would affect the underwriting decisions for the benefits
of critical illness and waiver of premium.

As no detailed sleep study had been done to assess the severity of the
policyowner’s obstructive sleep apnoea, the insurer had no access to
information for risk assessment. The Complaints Panel believed that had the
insurer been informed of his condition at the time of the insurance
application, it would have asked for more related information or arranged
further medical examination of the policyowner before accepting the risk.
Since the non-disclosed condition was so material as would have affected the
underwriting decision of the insurer, the Complaints Panel upheld the
insurer's decision to reject the claims.

1/6
 Remarks: In face of insurers’ declinature of claims on grounds of non-
disclosure, the claimants rather frequently argue that the losses in question
had no connection with the (alleged) non-disclosures, without being aware
that such a connection is not among the criteria for relying on the principle
of utmost good faith.

Case 3 At law insurance applicants are required to disclose material

facts to the insurers
The life insured died of tongue carcinoma. Finding out that the deceased was
a chronic drinker who consumed 10 cans of beer every day, the insurer
declined the death claim on the basis of non-disclosure – to the insurer’s
question "Have you ever smoked tobacco or taken drugs or narcotics or
alcohol as a habit?" on the application form, the deceased replied in the
negative.

The deceased's son insisted that his father did not have a drinking habit and
would only drink on special occasions. More importantly, there was no direct
relationship between alcoholic consumption and tongue carcinoma.

The Complaints Panel's attention was drawn to the medical reports of two
different hospitals indicating that the deceased had a habit of taking several
cans of beer daily for 30 years and was convinced that the deceased was a
chronic drinker. Since this piece of non-disclosed information would be
material enough to have affected the underwriting decision of the insurer, the
Complaints Panel supported the insurer's decision to reject the claim.

Remarks: As stated before, in face of insurers’ declinature of claims on

grounds of non-disclosure, the claimants rather frequently argue that the
losses in question had no connection with the (alleged) non-disclosures,
without being aware that such a connection is not among the criteria for
relying on the principle of utmost good faith.

(b) Non-medical application: if the insurance is arranged without a

physical examination of the applicant, the insurer will normally have
great difficulty alleging non-disclosure of a material fact not covered by
questions on the application or the personal physician's form.

(c) Medical application: if the insurance is arranged with a physical

examination of the applicant, the insurer cannot hold against the
applicant negligent omissions or mis-diagnosing by the medically
qualified person concerned.

1/7
 Case 4 At law insurance applicants are required to actively disclose
material facts to the insurers

The policyowner applied for a life policy and undertook a medical

examination at the insurer's appointed clinic. The application was accepted
by the insurer at an increased premium. Later, the policyowner passed away
due to a ruptured aortic aneurysm and pneumonia. The insurer rescinded the
policy from inception as an echocardiogram revealed that the policyowner
had suffered from a tachycardia attack, ectopic heart beat and ischcaemic
change two years before the insurance application.

The Complaints Panel felt that the policyowner had an onus to disclose all his
medical history, even though a medical examination had been provided by
the insurer, and therefore upheld the insurer's repudiation of the claim.

Remarks: Submitting himself to a medical examination as required by the

insurer may not constitute full disclosure of the applicant’s medical history
and condition to the insurer, unless the nature of such medical examination is
such that it will fully reveal such information.

(d) Medical tests: the insurer’s requests to supplement information supplied

verbally with reasonable medical examinations or tests are normally met,
but great care must be taken not to breach the Personal Data (Privacy)
Ordinance, which has the effect of requiring insurers to explain the need
for gathering information before any testing takes place. The subject of
the tests also has the right under that Ordinance to be told their results.

(e) Breach of the duty on the part of the policyowner: at law, a breach of
utmost good faith renders the contract voidable by the insurer. But with
most life policies in Hong Kong, regard has to be taken of a policy
condition known as an Incontestability Provision, which states that the
insurer will not contest the policy after it has been in force for a specified
period (contestable period), unless there is proof of fraud on the part of
the policyowner (see 4.2 for more details).

1.2.3 Other Insurance Principles

(a) Proximate cause: this principle is concerned with the identification of

the dominant, effective cause of the loss being claimed for under the
insurance. The principle does apply to every class of business, but it is
very likely to have rather less significance with life insurance partly
because of the minimal use of exclusions. The application of proximate
cause is very much concerned with different kinds of perils (i.e. causes
of loss):

1/8
 (i) Insured Perils: are those which are covered by the policy. Non-
life policies may specify the perils which are covered, and one of
those must be the proximate cause of the loss or it is
irrecoverable. In life insurance, the cause of death is not critical,
unless a suicide exclusion clause operates or an accidental death
benefit rider applies.

(ii) Excepted (or Excluded) Perils: in non-life insurance, all policies

carry some exclusions. If one of these operates with a claim, the
insurer is not liable for the whole of or part of the loss, depending
on the specifics of the exclusion. Life insurance policies seldom
have exclusions (but see Note 1 below).

(iii) Uninsured Perils: these are causes of loss which are neither
included nor excluded, for example water damage with fire
insurance. If property is damaged by water (e.g. by rain) with no
other cause involved, the damage is not covered. But if the water
damage is proximately caused by an insured peril (say fireman
fighting a fire with water hoses), the water damage is covered.
Such complexities are unlikely to arise with life insurance claims.

Note: 1 Suicide is a life policy exclusion, and the principle of proximate

cause will be an important tool to determine whether death arose from
suicide or not. However, even here the principle does not have full
impact, because suicide is only excluded for a limited time period
(suicide exclusion period) (see 4.12).

2 We may conclude that the principles of insurance, especially

those concerned with claims, have less application in life insurance than
in non-life insurance.

(b) Indemnity: this means an exact financial compensation for the loss
sustained and is very important in most types of General Insurance. As
far as life insurance is concerned, however,

(i) it is immediately obvious that the policy proceeds (or ‘insurance

proceeds’) in no way pretend to (or can) represent an exact
financial compensation. That is why life policies are called
benefit policies, not indemnity policies;

(ii) it is impossible to over indemnify. It is because the insurable

interests (closely linked with indemnity) in the majority of cases
is unlimited (see 1.2.1(c)).

(c) Indemnity corollaries: a corollary is a sub-principle and indemnity has

two corollaries, Contribution and Subrogation.

(i) Contribution: in most General Insurance classes, if by some

chance a person has more than one policy covering a loss, he does

1/9
 not get paid twice. Each policy contributes to (shares) the loss
rateably. On the other hand, if the insured has effected more than
one policy purposely, a vigilant claims handler might well take
that as an indication of fraud!

Life insurance policies are normally not subject to the principle of

indemnity, so it is quite normal for a person to have more than
one life policy and each must pay in full upon the insured event
happening.

(ii) Subrogation: this relates to the legal right of the insurer who has
provided an indemnity to take over any remedies the
“policyholder” (the UK equivalent of the American term
“policyowner”) possesses against third parties, to seek to recover
his payment to the policyholder. This does not apply to life
insurance.

If, for example, a third party negligently damages a person's car

(which has a comprehensive cover), the person's motor insurer
must pay but can attempt to recover its payment from the third
party. In that same accident if an innocent victim in the car is
killed, his life insurer must pay without an ensuing right of
recovery from the third party.

1.3 CALCULATION OF LIFE INSURANCE PREMIUM

The premium required for insuring a given life may have to take into account
individual features which make the risk better or worse than the average for a person
of that age and sex. That, however, is essentially a matter of underwriting, which we
shall consider in more detail in 5.3. Life insurance (premium) rates, which may be
thought of as the normal or standard premiums applicable according to age and sex,
are subject to certain common features considered below.

1.3.1 Rating Factors

The classic criteria usually applied to life insurance premiums are that
they should be:

(a) adequate: so that the insurer will have money to pay the benefit and meet
other obligations under the contract; and

(b) equitable (fair): so that each policyowner is paying an amount in line

with the risk and contracted benefits.

To achieve these criteria, a number of factors must be taken into account

in the course of rating.

1/10
1.3.1a Mortality, Interest and Expenses
(a) Mortality: perhaps more accurately phrased as the Rate of
Mortality, this indicates the rate at which insured lives are
expected to die. Whilst this sounds very morbid, it will be
immediately obvious that this is absolutely at the heart of life
insurance premium calculation. To know, on average, when the
life to be insured may be expected to die is a crucial factor in
determining the correct premium to charge.

Of course, individual lives may live much longer or shorter than

the average, but following the "law of averages" (which is
sometimes called the "law of large numbers") reasonable
predictions and calculations can be made. These are greatly
facilitated by the use of mortality tables, which are published
tables showing the expected rate of mortality at any given age.

As mentioned above, individual risks may call for special terms

and consideration, but that is an underwriting matter. Premium
rating using mortality tables merely deals with normal risks and
normal expectations.

(b) Interest: in very simple terms, life insurance involves collecting

money now and at specified intervals, to provide for a benefit at
some time or upon some event in the future. This, by definition,
means we have some time, and as the old saying goes "time is
money"!

How much time we have, on average, largely concerns (a) above.

The fact that we have some time means that we have an
opportunity for investment. The interest to be earned on invested
premiums is another crucial factor in determining premium rates.
If a particular insurer is anticipating above average returns of
investment, it can charge lower premium rates than a fair number
of its competitors, and/or make more profit for its shareholders.

Note: The above two factors combined will produce what is called the
net premium (sometimes called the pure premium), i.e. the money
required to be collected from the policyowners just to meet death claims
arising in the future under normal statistical expectations. But there is
more to consider.

(c) Expenses: the net premium has to be subject to a loading

(surcharge or additional sum) to take care of all expected and
probable expenses. These will include all internal operating costs,
commissions, tax and overheads to which any business is subject.
With life insurance, there is also the possibility (however remote)
of unusual mortality rates from some new disease or other disaster
- and existing premiums cannot be increased later to deal with
changed circumstances. Loading the net premium will include an
amount to cover that kind of contingency.
1/11
Note: The loading added to the net premium produces the gross
premium, which takes into account all three basic factors mentioned
above.

1.3.1b Other Factors

As mentioned, premiums for existing policies cannot be changed.

Life insurance belongs to long term business, and this implies that the
contract not only is very likely to last several years, but also it cannot be
cancelled or amended by the insurer without the consent of the
policyowner. Therefore, other factors which may arise from time to time
can only affect premiums for new policies. Some of the influences
which might have an effect on life premium rating are mentioned below:

(a) PAR or NON-PAR: this is extremely important. One unique

feature of life insurance is that a policy is either a "participating"
(PAR) policy or a "non-participating" policy (NON-PAR). The
owner of a participating policy is entitled to receive a varying
share of (or to "participate" in) the divisible surplus, if any, of the
insurer, normally on the policy anniversary dates. Such proceeds
are termed policy dividends or dividends. Though no policy
dividends are guaranteed, participating policies are subject to
higher premium rates than equivalent Non-Participating policies.

Note: 1 While U.S. insurers talk of par and non-par policies and
dividends, U.K. insurers issue policies which are either With-
Profit or Without-Profit, and declare bonuses. The concept is
the same, although there are differences between the U.S and U.K.
practices. Bonuses are usually reversionary (i.e. payable only
when the policy benefit is payable), whereas dividends are
payable upon annual declarations. Having said that, reversionary
bonuses can be surrendered without terminating the policy (see
1.3.2b(c)(i) for surrender values). Suppose a whole life policy has
earned an accumulated reversionary bonus of £5,000. The
policyowner is entitled to an immediate payment out of such
value, but only at a discount. Further suppose that according to
the insurer’s calculation based on factors such as the current age
of the life insured and the expected rates of interest, the future
bonus value of £5,000 is equivalent to an immediate surrender
value of £1,000. Then by surrendering, say, half of the
accumulated bonus value, the policyowner will be paid £500
immediately.

2 Not all life insurance policies can be par or non-par. Term

insurance plans (see 2.1.1) are normally not on a participating
basis.

3 For discussions on distribution of policy dividends, please

see 5.2.7.

1/12
 (b) Competition: no insurer enjoys a monopoly position. What the
market is charging cannot be ignored.

(c) Economic changes: extended times of affluence or recession will

doubtlessly have an impact on all product prices, including
insurance.

(d) Public health: abnormal developments in this area (e.g. the AIDS
epidemic) cannot be ignored in rating.

(e) Fiscal changes: a lasting increase in tax levels must be reflected

in higher premium rates.

(f) Company objectives and marketing strategies: if a company is

determined to increase its market share, competitive premium
rating is surely one of the possible marketing strategies.

1.3.2 Pricing Systems

The natural and level premium systems for life insurance premium
calculations might well be described as "ancient" and "modern" respectively,
for reasons that will be clear shortly.

1.3.2a Natural Premium (Pricing) System

The natural premium system (or the natural premium pricing

system) was used by some life insurers in the early days of the business.
It was very logical, but it was doomed to failure because of its built-in
features which virtually guaranteed that it could not work long-term in
practice. Such features were:

(a) Premiums: these were not to be constant throughout the policy

term, but individually calculated each year so that they reflected
the natural risk position (age, etc.) of the life insured at each
policy anniversary.

(b) Short-term consequences: with increasing age, there is increased

mortality risk. Premiums for existing policies therefore increased
every year.

(c) Longer-term consequences: these, in hindsight, were very

predictable and included:

(i) increasing premiums with increasing age and, in later

years, decreasing disposable resources or earning power of
the policyowner, often presented real problems with
continuation of insurance;

(ii) the system was vulnerable to anti-selection (also known as

selection against the insurer), whereby the better risks -

1/13
 those in good health and with real prospects of a long life -
dropped out of the scheme as it became more expensive,
and the bad risks would normally decide to continue, for
obvious reasons. This creates an imbalance of risks, or a
failure to satisfy a criterion of the law of large numbers, i.e.
the existence of a large, if not infinite, number of
homogeneous exposure units in the pool.

(d) Present day: the Natural Premium System is no longer practised,

at least not for policies which are truly "long-term".

Note: We may be tempted to be scornful of a scheme which we can now

see to have such obvious defects. But it is easy to live life in retrospect.
Problems and shortcomings usually only appear through experience.

1.3.2b Level Premium (Pricing) System

The level premium system (or the level premium pricing system)
is now the norm and its features are described below:

(a) Basic concept: by the judicious use of mortality tables and

actuarial calculations, it was realised that it was possible to quote
an annual premium that would remain level (unchanged) for the
duration of the contract, based upon the age, sex and individual
underwriting features of the life to be insured. This, of course,
assumes that the death benefit level also remains unchanged.
Compared with the cumbersome and unsatisfactory features of the
natural premium system, the advantages and attractiveness of
such a system are obvious. Therefore, it quickly superseded the
old system.

(b) Short-term consequences: clearly, the level premium system

envisages a long-term contract, where an unchanging annual
premium will effectively "average out" over the years. It implies
that the annual premium is "too much" for the risk involved in
early years, and may be "too little" for the risk involved in later
years.
Of course this is a simplification, but it is not inaccurate. From
this concept, it may be seen that once the initial expenses and
costs of setting up a policy have been absorbed, the early years’
"excess" premiums plus the interest earnings thereon start to
create a fund or reserve against the future liability.
In the usual practice of non-life insurance, the premium is
calculated each year and at the end of the year the premium is
considered fully earned by the insurer. The life policy, under the
level premium system, soon begins to build up a cash value for
the policyowner.

1/14
(c) Longer-term consequences: some of the implications and
products of (b) above will be examined in more detail in Chapter
4, but we may briefly mention the features that developed from
the early years’ "surplus" premiums found with the level premium
system:
(i) Cash value and surrender value: When a policy has been
in force long enough to "clear" the set-up costs, part of the
premiums received – after the risk premium for the past
period has been deducted – can be considered to be "not
yet earned" by the insurer; it is referred to as a “cash
value”. Therefore, when a policyowner cancels a policy
that is carrying a cash value, there should be a sum of
money payable to him, representing a refund of premiums
"unearned" by the insurer. This sum is known as
“surrender value”. Surrender value equals cash value
minus surrender charge, a charge that is applicable when a
policy is surrendered for its cash value or when a policy,
under some plans, is adjusted to provide a lower amount of
death benefit.
Note: This is not true for Term Insurance (see 2.1.1),
where the premium is geared only to the risk of death
during a specified period of cover. Such policies have no
cash value.

(ii) Policy loan: the cash value is an acceptable collateral

security for a loan. Borrowing money from the insurer
using the cash value as security is now a right under
modern policy terms.

(iii) Nonforfeiture: without specific policy provisions to the

contrary, a life insurance policy will lapse (i.e. discontinue)
if renewal premiums are not paid when due. However, its
cash value, if sufficient, may be used voluntarily by the
policyowner or sometimes automatically under policy
terms, to keep the insurance in force (see 4.5).

(iv) Paid-up insurance: should the policyowner decide that he

cannot or does not wish to pay any further premiums, he
may, as an alternative to policy surrender, pay up the
policy. This means that he is not paying any more
premiums and yet the policy stays in force exactly as before
(so that a participating policy will continue to yield
dividends), except that he is now insured for a lower
amount of insurance called the “paid-up value”, in line with
the net cash value and the premiums saved as a result of his
choice. A paid up policy is sometimes referred to as a
reduced paid up policy, to reflect the normal fact that the
paid up value is smaller than the face amount. This
1/15
alternative arrangement is largely possible because the
premiums paid in the early years of the policy have yet to
be "fully earned" by the insurer.

-o-o-o-

1/16
 Representative Examination Questions

Type "A" Questions

1 "Life insurance provides a sum of money if the person who is insured dies whilst
the policy is in effect." This quotation:

(a) is completely inaccurate; .....

(b) completely describes all life insurance contracts; .....
(c) does not completely describe all life insurance contracts; .....
(d) is totally misleading and contains no element of truth in it. .....

[Answer may be found in 1.1]

2 Which of the following represents a legitimate insurable interest for life

insurance?

(a) insurance of oneself; .....

(b) insurance of one's spouse; .....
(c) insurance of one's 10-year-old child; .....
(d) all the above. .....

[Answer may be found in 1.2.1]

Type "B" Questions

3 Which two of the following statements are true?

(i) A benefit policy is the same as an indemnity policy.

(ii) Most life policies are subject to indemnity, but some are not.
(iii) Life insurance contracts are not normally subject to indemnity.
(iv) Indemnity does not normally apply to life insurance, where benefit
policies are prevalent.

(a) (i) and (ii); .....

(b) (i) and (iii); .....
(c) (ii) and (iii); .....
(d) (iii) and (iv). .....

[Answer may be found in 1.2.3]

1/17
4 Which three of the following are features in calculating life insurance
premiums?

(i) Interest
(ii) Expenses
(iii) Mortality
(iv) Morbidity

(a) (i), (ii) ad (iii); .....

(b) (i), (ii) and (iv); .....
(c) (i), (iii) and (iv); .....
(d) (ii), (iii) and (iv). .....

[Answer may be found in 1.3.1a]

Note: The answers to the above questions are for you to discover. This should be
easy, from a quick reference to the relative part of the Notes. If still required,
however, you can find the answers at the end of the Study Notes.

1/18
2 TYPES OF LIFE INSURANCE AND ANNUITY
To the public and perhaps inexperienced insurance intermediaries, there must
seem to be a bewildering variety of life insurance contracts. Certainly, it is a
sophisticated and well-developed market, but a few basic guide rules should prove
helpful:

(a) Basic functions: it is good to distinguish the various products offered by life
insurers by what the products seek to do. Another way of thinking about that is
to ask the question: "Under what circumstances is/are the death benefit(s)
payable?” Some basic formats are:

(i) payment on death only if it occurs during a specified period;

(ii) payment on death at any time;

(iii) payment on a specified date or on earlier death.

(b) Basic variables: some additions/modifications to the above are:

(i) the type of policy (called the plan) may be convertible, i.e. able to be
changed into a different plan, at the policyowner's option;

(ii) renewable, if originally for a limited time period (e.g. five years);

(iii) Par or Non-par: see 1.3.1b(a);

(iv) various Riders, i.e. endorsements, are often added to the basic policy to
provide additional cover.

(c) Basic questions: much heartache and misunderstanding in the whole business
of life insurance selling would be avoided if insurers and insurance
intermediaries clearly put the following two questions to potential policyowners
(and of course acted in accordance with the answers):

(i) "What do you want the insurance to do for you?", i.e. what is it for?

(ii) "How much premium are you able and willing to pay?", i.e. what can
you afford?

Note: The other basic question “How much life insurance do you need?” is of
course important, but this is usually answered by the insurance intermediary
rather than the applicant.

Given these important preliminaries, we may now think about specific policy
types. We should just say, however, that we shall only be considering an outline of the
various covers, so that you may be in a position to identify and broadly distinguish the
various types of plan available. Professional skill and discrimination can only be
obtained through experience.

2/1
2.1 TRADITIONAL TYPES OF LIFE INSURANCE

These will consist of the three basic formats mentioned in (a) above, although
there are many possible variations and combinations of the different types of cover.
The major traditional types we shall consider are as follows:

2.1.1 Term Insurance

Such kind of insurance provides cover for a specified period or term

only, and may also be described as temporary life insurance. The policy
benefit is only payable if:

(a) the life insured dies during the specified period, or term; and

(b) the policy is valid (in force) at the time of death.

In the great majority of cases, term insurance plans run their course
without a claim. For these reasons, it is the cheapest form of cover available
(but, of course, its limitations must be understood).

In theory, the term could be for any period of time, even a few hours to
cover an aircraft flight, for example. In practice, it is rare to find a term
insurance for a period of less than one year.

2.1.1a Level/Decreasing/Increasing Term Insurance

(a) Level term insurance: this policy plan is perhaps the most
popular term insurance. It involves a level death benefit
throughout the policy period. In the event of death during the
term, the face amount (also known as face value) of the policy
is payable. The level of annual premium usually remains the
same throughout the policy term.

Popular largely because of its simplicity, this is a useful answer

to a temporary need which neither increases nor decreases to any
significant extent over the period of time involved (perhaps a
loan which is not being repaid by instalments).

(b) Decreasing term insurance: under this plan, the death benefit
decreases annually, or at other specified times. The level of
annual premium usually remains the same throughout the policy
term. Because the benefit is continually decreasing and is
payable only on death during the term, this is the cheapest form
of life insurance available. It is particularly suited for a
temporary need which is reducing. Some typical examples are:

(i) Credit life insurance: designed to pay the balance of a

loan direct to the lender should the borrower die before a
full repayment of loan has been made. This plan is usually

2/2
 sold to lending institutions on a group basis to cover the
lives of their borrowers.

(ii) Family income insurance: perhaps linked with another

policy plan which provides a lump sum payment on death,
a family income plan will pay a stated monthly death
benefit to the beneficiaries for the remainder of a specified
period (the total amount payable (i.e. monthly benefit x
number of payments) is therefore decreasing as time goes
by). Suppose a life insured under a 5-year family income
plan for a monthly benefit of $1,000 dies at the end of year
4. The plan will pay the beneficiary 12 monthly payments
of $1,000 each, totalling $12,000. On the other hand, a
death at the end of the 50th month will mean 10 monthly
payments of $1,000 each, totalling $10,000.

(iii) Mortgage redemption (or ‘mortgage protection’)

insurance: a typical mortgage loan is reduced by monthly
or other periodic payments. Mortgage redemption
insurance is a decreasing term insurance designed to
provide an amount of death benefit which corresponds to
the decreasing balance of a mortgage loan. At any rate, the
initial face amount and the subsequent reduced amounts are
set at the time of purchase on the basis of the plan of
repayments. Such a plan may be on a joint-life basis (e.g.
husband and wife), the benefit being payable when the first
life dies. A joint-life plan may in addition pay upon the
second life’s death, to help pay funeral costs and expenses.
(The major differences between mortgage redemption
insurance and credit life insurance are that (a) the former
insures the interests of the mortgagors (who may
sometimes be required by the mortgagees to name the
mortgagees as beneficiaries) whereas the latter insures the
lenders’ interests, and (b) the former is a benefit insurance
so that claims will still be payable even if at the time of
death the debt has already been paid off whereas the latter
is normally an indemnity insurance.)

Note: The above form of cover must not be confused with

Mortgage Indemnity Insurance. This is quite different,
being an insurance for mortgagees. It covers the risk of
non-repayment of mortgage loans for any reason.

(c) Increasing term insurance: this plan, as the name suggests,

insures a death benefit which increases annually or at other
intervals. The increases may be at a fixed percentage, or in line
with an agreed index (e.g. the Composite Consumer Price Index).
The basic idea is to maintain the purchasing power of the benefit,
which is especially important where severe inflation is

2/3
 anticipated. The premium generally increases in line with the
increases in the level of benefit insured.

2.1.1b Renewable/Convertible Term Insurance

(a) Renewable term insurance: at first sight, this seems to be a

contradiction, because a term insurance is for a fixed period, and
this extends the period. The key point, however, is that the right
to renew the policy is exercisable without submitting evidence of
insurability (health) and the premium for the further period is
increased to reflect the increased age of the life insured. (The
new premium is said to be based on the attained age.)

Because such a plan can lead to anti-selection (see 1.3.2a(c)(ii)),

some limitations such as the following may be put in place:

(i) renewals may only be for the original face amount or

smaller face amounts;

(ii) the number of renewals permitted may be restricted (e.g.

three times);

(iii) the premium rate for a renewable term policy is usually

higher than that for a comparable non-renewable term
policy.

Frequently, one-year term policies are made renewable, either by

a basic policy provision or a rider. These have the obvious name
Yearly Renewable Term (YRT) or Annually Renewable Term
(ART) insurance.

(b) Convertible term insurance: such a plan gives the policyowner

a conversion privilege, i.e. the right to convert (change) the policy
to a permanent plan without providing evidence of insurability
(health). If this privilege is exercised, the premium for the
permanent plan must be calculated on the basis of the standard
rate for such a plan based on the attained age of the life insured.
Because anti-selection is again a possibility with such a plan,
restrictions are usually put in place:

(i) conversion may not be permitted beyond a certain age (say

55 or 65);

(ii) conversion may not be permitted after the policy has been
in force for say 50% of its specified term (or a specified
number of years);

(iii) the face amount of the permanent plan will be limited to

that of the term insurance (probably less after the term
policy has been in force for some specified time).
2/4
2.1.2 Endowment Insurance

An endowment plan will pay the face amount when the life insured
survives a specified term but upon death in case he dies within the term. When
the life insured survives the insurance period, the policy is said to mature. As
with term insurance, the description of the policy must include reference to the
number of years of insurance, e.g. a 20-year endowment. Features to be noted
with this plan are:

(a) Premiums: are not cheap, since under normal circumstances the face
amount must become payable not later than the specified term in the
future; premiums are level, normally paid annually, although single
premium endowments are possible;

(b) Technically: the plan is a combination of a term insurance and a pure

endowment for equal amounts. (A pure endowment is a contract under
which the death benefit is only payable if the life insured survives the
term);

(c) Par or non-par: such a plan may be on a participating (with-profit) or

non-participating (without-profit) basis, at an appropriate premium;

(d) Popularity: because in principle such a plan provides the best of both
worlds (premature death protection and personal savings for the
policyowner if the policy matures), these have an apparent attraction.
However, probably because of the relatively high premium rates, such
plans do not have great popularity here, or in many other markets at
present.

2.1.3 Whole Life Insurance

Such a plan, quite literally, provides cover that will last the whole of
one's life (sometimes it is called whole of life insurance). The fundamental
feature is that the face amount is paid on death, whenever that occurs, and not
before. Having said that, when the life insured reaches the age at the end of the
mortality table that has been used to calculate premiums for that policy, usually
99 or 100, the insurer will pay the face amount, putting an end to the contract.
The relevant policy features to note are:

(a) Premiums: are level, but may be subject to different provisions,

including:

(i) payable throughout life: in which event the policy may be called a
straight life insurance policy, or a continuous premium whole
life policy;

(ii) payable for a limited period: the policy may specify a number of
years during the lifetime of the life insured for premium
payments;

2/5
 (iii) premium subject to an age-related limitation: instead of
specifying a number of years, the policy may stipulate an age (say
65) after which no more premiums are required. As with (ii)
above, premiums are only payable up to the date of death if it
occurs before the specified years/age;

(b) Par or non-par: either plan is permissible;

(c) Variations: many variations are possible, such as premiums which

increase, or face amounts which change, at specified times during the
policy's life, to cater for different needs as time goes by. One such
variation is called a graded-premium policy, where the premium
increases (against a level face amount) on a regular basis, say every
three years, until it equals the level premium that has been prescribed for
the rest of the life of the policy.

2.2 NON-TRADITIONAL TYPES OF LIFE INSURANCE

Life insurance, more or less in its present form, has been practised for
approximately 400 years. During that time, the basic policy formats have become
very established and they still form a practical and useful role in providing this
important form of cover. However, the pattern of economic and social life does not
stand still and new products have been developed, often providing a more flexible
approach to life insurance cover and associated investment. We look at two such
examples.

2.2.1 Universal Life Insurance

In an attempt to provide greater consumer choice and flexibility, this
product has been developed, in the form of a variation of the whole life
insurance. It has been well described as a life insurance contract which:

(a) is subject to flexible premiums;

(b) has an adjustable death benefit;

(c) has an “unbundled” pricing structure; and

(d) accumulates a cash value.

We examine these and other features of this innovative product:

(a) Flexible premiums: subject to a minimum level of first-year premium

payment(s), the policyowner is allowed to enjoy the feature of flexible
premiums. After the first policy year, he can even skip premium
payments. Of course, the amounts of cover and cash value depend on
how much premium has been paid and when the cash value is inadequate
to cover the next, say 60 days of expense and mortality charges, the
policy will lapse.

2/6
(b) Adjustable death benefit: subject to certain limits, the death benefit
purchased may be increased or decreased, although proof of
insurability may be required for an increase in benefit.

(c) “Unbundled” pricing: the insurer separates and individually discloses,

both in the policy and in an annual report (see (f) below) to the
policyowner, the three basic pricing factors, i.e.:

(i) the pure cost of protection (covering the death risk);

(ii) interest; and

(iii) expenses. (The calculation of life insurance premiums includes an

item for expenses, called loading (see 1.3.1a(c)). Normally this
is not disclosed to the policyowner, but with universal life
insurance the expenses and other charges element is specifically
disclosed to a purchaser.)

(d) Cash value: the intention is that the policy should acquire an increasing
cash value. This of course is heavily influenced by the amount of
premiums paid by the policyowner. After the first premium payment,
additional premiums (subject to an individual limit) can be paid at any
time. These, with interest earnings, are added to the cash value after the
deduction of:

(i) a specified percentage expense charge; and

(ii) the pure cost of protection (deducted monthly).

(e) Death benefit: according to the plan the policyowner chooses, this may
be a face amount plus the cash value, or the face amount only. For a
given face amount and given premium amounts, the former option will
mean a lower rate of accumulation of cash value because the insurer
needs to be compensated for running a risk of paying out a higher
amount of death benefit.

(f) Annual report: each year the policyowner receives a report which
shows the status of the policy. The information given includes:

(i) the death benefit option selected (see (e) above);

(ii) the specified amount of insurance in force;

(iii) the premiums paid during the year;

(iv) the expenses deducted during the year;

(v) the guaranteed and excess interests earned on the cash value;

2/7
 (vi) the pure costs of insurance deducted;

(vii) policy loan outstanding;

(viii) cash value withdrawals; and

(ix) the cash value balance.

It will be seen that this is a sophisticated product, allowing great choice

to the policyowner to adjust his insurance according to his needs and
financial resources as time goes by. Insurance intermediaries are
advised to consult the insurers on local forms of this modern insurance
plan.

2.2.2 Unit-Linked Long Term Insurance

Also known as a “linked long term policy” and “investment-linked long

term policy”, the unit-linked long term policy is one whose value is directly
linked to, or directly reflects, the performance of the investments that have been
purchased with the premiums paid. This may be achieved by formally linking
the policy value to units in a special unitised fund run by the insurer, or to units
in a unit trust. The value of the units is directly related to the value of the
underlying assets of the fund or unit trust. Because of such linkage, the policy
value naturally fluctuates according to the overall movements of those assets.

A detailed study of this sophisticated financial product is beyond the

needs of this study and is instead within the scope of the Paper ‘Investment-
linked Long Term Insurance’. The following features of the product suffice for
your study here:

(a) Common principle: unit-linked policies may come in a variety of forms,

but there is a common factor. All or part of the premiums will be used to
purchase units in a fund at the price applicable at the time of purchase.
The value of the policy will then fluctuate according to the value of the
units allocated to it.

(b) Types of funds: a variety of funds may be used for linking purposes,
including equities (ordinary shares), fixed interest investments and a
whole range of cash and other asset funds.

(c) Types of policy: in theory, any kind of life insurance product may be
unit-linked. The most common in practice are whole life and
endowments, sometimes with a guaranteed minimum value, however
unit prices may move.

Special care must be taken with products which are essentially

investments, so that the consumer is aware that values may go up or down.
This aspect is considered more in 5.2.6.

2/8
2.3 ANNUITIES AND PENSIONS

Each refers to income or other financial provision (usually) for retirement or old
age. A definition of each term is:

(a) Annuity: a contract whereby an insurer promises to make a series of periodic

payments (called “annuity benefit payments”) to a designated individual (called
the “payee”) throughout the lifetime of a person (called the “annuitant”) or for
an agreed period, in return for a single payment or series of payments made in
advance (called “annuity considerations”) by the other party to the contract
called the “contractholder” (or “annuity purchaser”). Very often, the payee,
annuitant and contractholder are the same person.

(b) Pension: a plan to provide for a monthly (or other periodic) income benefit to a
person in retirement, until his death. It may consist of an annuity.

2.3.1 Annuities

Under a simple annuity plan, the balance of the annuity considerations

paid is “lost” if the annuitant dies before their exhaustion. This has very little
public appeal, especially in Hong Kong, so annuities are not commonly found
in practice. They have their uses, particularly with elderly people with a
reasonable to considerable amount of capital and no living dependants or close
family. In such circumstances, a guaranteed income for life may have its
attractions, especially in view of the consequent removal of the temptation to
spend the capital at an excessive rate.

Some features to be noted with annuities are:

(a) Immediate annuity: usually purchased with a single payment, it

starts making annuity benefit payments one annuity period (time
span between one scheduled payment and the next in the series;
say, one month) immediately thereafter.

(b) Deferred annuity: the annuity benefit payments begin at some

specified time or specified age of the annuitant, rather than
immediately.

(c) Variations: a number of possible variations exist. The annuity

certain provides for annuity benefit payments to be made for a
fixed number of years only, whether death occurs in the meantime
or not. The life annuity is one that provides for periodic benefit
payments for the lifetime of the annuitant, and it is also referred to
as a whole life annuity to distinguish it from a temporary life
annuity, under which benefits payments are made during a
specified period but only as long as the annuitant is alive. The life
income annuity with period certain (or known as a guaranteed
annuity) provides for benefit payments to be made for at least a
specified number of years, even where death occurs within the

2/9
 period, and for the duration of the life of the annuitant if he
survives the period.

(d) Underwriting: the underlying philosophy of annuities is

completely opposite to that with life insurance. With the latter,
the premium rate increases with age at inception and is higher
for men than women of the same age. With annuities, the amount
of each annuity benefit payment increases with age at payment
commencement, and men receive a higher annuity benefit
payment than women of the same age do. Put briefly, life
insurance is based upon the chances of dying while annuities are
based upon the chances of living!

2.3.2 Pensions

In Hong Kong pensions are often considered to be more in the

Government realm (for example for most Civil Servants). More common in the
non-Government sector are Provident Fund Schemes, which provide for a
lump sum benefit on retirement or other specified time, rather than an income.
The Mandatory Provident Fund System, implemented since December 2000, is
having a profound effect in this area.

2.4 GROUP AND INDIVIDUAL INSURANCE PLANS

The majority of the plans we have considered so far have been with applications
for the insurance of individuals, either insuring themselves or another person. This
remains a key element in the field of life insurance, but group insurance is playing an
increasing role. This is especially so with employee benefit plans, where an employer
provides a form of life insurance, often as an additional benefit supplementing salaries
and wages. Again, this is a complex area, but there are certain features that we may
note:

(a) Basic difference: the most obvious difference between individual and group
insurance plans is that the latter covers a number of people under a single
policy. Sometimes this is called a master group insurance contract.

(b) Contracting parties: these are the insurer and the group policyholder, usually
an employer, but possibly a club or other organisation insuring its members.
The persons within the group who are covered may be referred to as group
insured or sometimes group lives insured or persons insured.

(c) Different plans: plans may either be contributory (where the employees or
other persons insured pay a share of the premium) or non-contributory (where
individual members do not contribute towards the premium).

(d) Eligible groups: usually group insurance concerns a single employer, covering
his staff members (collectively called a ‘group’), but the members of
association groups (i.e. members of clubs, trade unions, sports associations,
etc.) formed for a purpose other than purchase of insurance could equally be

2/10
 considered eligible. Besides, multiple-employer groups (consisting of the staff
members of different companies) may participate in a single plan.

(e) Underwriting: doing business "in bulk" means that the high degree of
underwriting attention applicable to individual insurance is neither possible nor
necessary. Detailed individual information is usually not required with group
plans.

(f) Individual eligibility: eligibility is usually decided by the employer, and the
criterion for admission to group coverage is usually stated in an actively-at-
work provision. This requires that the individual was not only employed, but
also at work (not ill or on leave) when coverage became effective.

(g) Cover declined: an eligible person (particularly with contributory schemes)

may initially decline coverage. Should that person change his mind later,
evidence of insurability may be required (to counteract anti-selection).

(h) Termination of cover: for individual persons insured, their cover may
terminate upon ceasing to be eligible (leaving the employer or group) or failing
to pay any required premium. Some plans allow individuals to convert their
previous group cover into individual cover, often without proof of insurability
but normally within a specified time period.

-o-o-o-

2/11
 Representative Examination Questions

Type "A" Questions

1 There are two common questions which can very usefully be asked by the
honourable insurance intermediary with any enquiry about life insurance. One
of these questions is "What do you want the insurance to do for you?" The
other is:

(a) "How much money do you have?" .....

(b) "What is the commission rate for me?" .....
(c) "Do you really think you need this insurance?" .....
(d) "How much premium are you able and willing to pay?" .....

[Answer may be found in 2]

2 Decreasing term insurance means that:

(a) the death benefit goes down each year; .....

(b) the premium goes down each year; .....
(c) the death benefit and the premium go down each year; .....
(d) the commission to the agent goes down each year. .....

[Answer may be found in 2.1.1a]

Type "B" Questions

3 Anti-selection is a possibility with convertible term insurance. Which of the

following are intended to discourage or counteract anti-selection?

(i) Conversion not allowed after say age 55.

(ii) The permanent insurance face amount must be for more than this policy.
(iii) Conversion not possible after the policy has been in force for some years.
(iv) The permanent insurance face amount must not be for more than this
policy.

(a) (i) and (ii); .....

(b) (i), (iii) and (iv); .....
(c) (ii), (iii) and (iv); .....
(d) (i), (ii) and (iv). .....

[Answer may be found in 2.1.1b]

2/12
4 Which three of the following are not true in relation to whole life insurance?

(i) The death benefit payable decreases each year.

(ii) The death benefit is only paid when the life insured dies.
(iii) The death benefit is only payable after a fixed number of years.
(iv) The death benefit is payable after a fixed number of years or on earlier
death.

(a) (i), (ii) and (iii); .....

(b) (i), (ii) and (iv); .....
(c) (i), (iii) and (iv); .....
(d) (ii), (iii) and (iv). .....

[Answer may be found in 2.1.3]

[If still required, the answers may be found at the end of the Study Notes.]

2/13
3 BENEFIT RIDERS AND OTHER PRODUCTS
Note: The term “policyowner-insured”, as readers will come across in this chapter,
refers to cases in which the life insured and the policyowner are the same person.
Most life insurance policies are issued to policyowners who are also the lives insured
(or ‘lives assured’ in British terminology). However, readers should also be aware that
when one person purchases insurance on the life of another person (the policy being
referred to as a ‘third party policy’) the purchaser is the policyowner and the person
whose life is insured is the life insured.

3.1 DISABILITY BENEFITS

Also known as an endorsement, a rider (or policy rider) is such an amendment

to a policy that becomes part of the insurance contract and that either expands or limits
the benefits payable under the contract. A rider that excludes coverage is known as an
exclusionary rider. We shall consider two common riders applicable to situations
where the policyowner-insured becomes subject to some form of physical disability.

3.1.1 Disability Waiver of Premium (known as a WP Benefit Rider)

A waiver is an act of voluntarily giving up a right or removing the

conditions of a rule. Under a Disability Waiver of Premium Rider, which may
be added to virtually all types of life insurance policies, the insurer agrees to
waive his right to renewal premiums otherwise payable whilst the policyowner-
insured is totally disabled. This does not mean that the policy is suspended.
Instead it remains in force, so that a policy that builds a cash value will continue
to do so, and a participating policy will continue to yield dividends, as if the
policyowner had paid the premiums.

For the purposes of a WP Benefit Rider, “total disability” may mean that,
because of disease or bodily injury, the life insured cannot do any of the
essential acts and duties of his or her job, or of any other job for which he or she
is suited based on schooling, training or experience. Another form of “total
disability” is also covered, i.e. the life insured’s total loss, starting while the
rider is in effect, of the sight in both eyes or the use of both hands, both feet, or
one hand and one foot.

3/1
 Case 5 Definition of “total and permanent disability” for purposes of
“waiver of premium” rider

The insured, who was a fireman, had been suffering from chronic low back
pain and bilateral knee pain since early 1998. An x-ray photo of the
lumbosacral spine revealed degenerative changes. His employment contract
with the Fire Services Department was terminated in July 1999 because the
Medical Board had assessed him to be unfit to continue working as a
fireman. The insured believed that his condition had met the policy
definition of Total and Permanent Disability and submitted a claim for
waiver of premiums.

According to the policy definition, Total and Permanent Disability means

“the life insured is unable to engage in any gainful occupation as a result of
sickness or injury”. The insurer declined his claim on the basis that a
medical report had confirmed that the insured could work and walk unaided
without functional limitation. Moreover, the Fire Services Department had
confirmed that the insured’s particulars had been circulated to other
government departments in search of alternative employment.

Having noted the above, the Complaints Panel was of the view that whilst the
disability had resulted in the life insured being unable to continue his old
occupation as a fireman, it did not prevent him from engaging in another
gainful occupation. As such, it supported the insurer's decision to decline the
claim for waiver of premium.

Remarks: the policy concerned has adopted a rather restrictive definition

for “total and permanent disability” for the purposes of its “waiver of
premium” rider, while more liberal definitions are available.

There are normally some limitations, as follows:

(a) Waiting period: where the policyowner-insured has been totally

disabled as defined in the policy for a minimum period (usually three or
six months), renewal premiums will be waived. Once started, waivers
will continue throughout the life of the policy until the disability ends.
The original thinking behind Waiting Period probably was that most
people continue to receive salaries and wages for at least short periods of
disablement and so can still afford to pay premiums. But in fact some
WP benefit riders will refund premiums which have been paid during the
waiting period if the disablement extends beyond the waiting period, in
which case the waiting period is a kind of "time franchise". (For
illustrations of franchise, please read Chapter 3 of the Principles and
Practice of Insurance Examination Study Notes.)

3/2
(b) Age limitation: usually waivers are only available to cover disabilities
which begin during a specified age range, such as the age range of 15 -
65.

(c) Premium frequency: differing practices exist as to what mode of

premium payment is assumed when premiums are being waived. For
example, if premiums are being waived on a monthly basis, the insured
person who recovers, say, 25 days after a premium has been waived
would have to resume premium payments the following month. On the
other hand, if premiums are being waived on an annual basis, his
recovery after, say, 2 months would result in a waiver of premiums for
an additional 10 months while he is no longer disabled, unless some
adjustments are made. In view of such an undesirable situation, some
policies provide that an annual premium-paying mode will automatically
switch to a monthly mode for the purposes of premium waivers.
Alternatively changes to the frequency of premium payments during
disability periods are expressly disallowed.
(d) Exclusions: the cover given by this rider is similar to personal accident
or medical insurance, so it normally carries some similar exclusions,
such as:
(i) intentional self-inflicted injuries;
(ii) injuries sustained whilst engaging in criminal activities;
(iii) pre-existing conditions;

(iv) injuries resulting from war while the policyowner-insured is in

military service.

3.1.2 Disability Income

Whereas a WP rider gives relief from expenditure during total disability,

a Disability Income rider (as the name suggests) provides an income during
periods of total disability. Again, a Disability Income rider may be added to
virtually all types of life insurance.
The usual provisions of this rider include:
(a) Definition: “Total Disability” is defined in the manner as does a WP
Benefit Rider (see 3.1.1 above).
(b) Amount payable: two alternative methods are used to establish the
amount of disability income to be paid: an income formula and a flat
benefit amount. A typical group disability income policy adopts an
income formula, which expresses the income amount as a percentage of
the insured member’s pre-disability earnings, less the amount of any
disability income benefit he receives from another source. Where a flat
benefit amount is payable, no regard is to be paid to any other income
benefits the insured member receives.

3/3
 (c) Waiting period: similar in concept to that applicable with the WP rider,
but the period varies from one to six months.

(d) Not a loan or an advance payment: the basic policy remains in full
force during total disability so that if death occurs during a period of total
disability the face amount of the basic policy is payable in addition to
any income benefits paid or payable.)

3.2 ACCIDENT BENEFITS

Accident benefits that are commonly added to any kind of life insurance policy
relate to accidental death and dismemberment. Frequently they are combined in a
single rider, known as an Accidental Death and Dismemberment (AD&D) Rider.

3.2.1 Accidental Death and Dismemberment

To consider these separately, although they are frequently combined:

(a) Accidental death benefit (ADB): this normally undertakes to pay a

benefit equal to the face amount of the basic policy as an additional sum
should death be caused by an accident. The customary provisions are:

(i) death must have been caused directly and independently of all
other causes, by an accidental bodily injury, and have occurred
within one year after that injury;

(ii) customary personal accident insurance exclusions apply,

including:

(1) intentional self-inflicted injuries (e.g. as a result of suicide);

(2) war-related injuries;

(3) injuries whilst engaging in illegal activities;

(4) aviation injuries (except as a fare-paying passenger);

Note: 1 This benefit is often called a Double Indemnity Benefit. We

know from earlier studies (see 1.2.3(b)) that the use of the term
‘Indemnity’ here is technically inaccurate, since life insurance is
normally not subject to the principle of indemnity.

2 Also referring to previous studies (see 1.2.3(a)), proximate

cause becomes important with this rider. By contrast, the cause
of death is in most cases irrelevant in relation to claims under the
basic life insurance plan.

3/4
(b) Dismemberment: literally "dismemberment" means losing one or more
members (limbs), but the term within the AD&D rider relates to both the
loss of limbs and the loss of sight. The usual provisions are:

(i) Basic cover: normally, a sum equal to the accidental death benefit
is payable if the life insured loses any two limbs or the sight in
both eyes as a result of an accident.

(ii) Lower benefit: often policies provide for payment equal to a

stated proportion of the accidental death benefit if an accident
results in the loss of one limb, the loss of sight in one eye, or
another specified lesser injury.

(iii) Definition: the loss of a limb may be described as the actual loss
of limb (by physical severance at or above the wrist or ankle) or
the loss of the use of the limb.

(iv) Combination: normally, the policy provides that where the same
accident has resulted in both dismemberment and death, it will
pay either the dismemberment benefit or the death benefit, but not
both.

3.2.2 Other Accident Benefits

Different insurers may provide various forms of cover, but a typical rider
giving other accident benefits has the following features:

(a) Benefit schedule: accidental bodily injuries being covered, a schedule

(or list) of specified injuries is given, with a corresponding benefit
against each. The list usually includes:

(i) Death 100% of sum insured;

(ii) Loss of Two Limbs a specified percentage;

(iii) Total Loss of Sight a specified percentage;

(iv) 1 Limb & Sight in 1 Eye a specified percentage;

(v) Either 1 Limb or Sight in 1 Eye a specified percentage;

(vi) Various specified lesser injuries - see below

Lesser injuries: comprise a detailed list of possible injuries, ranging

from serious impairments (e.g. loss of a thumb or index finger) to
relatively minor ones (e.g. loss of a single finger joint).

3/5
 (b) Other benefits: cover may include one or more of the following:
(i) Serious Burns - at least third degree burns: a specified amount $;
(ii) Weekly Benefits - during disability: a specified amount $ (for no
more than 52 weeks);
(iii) Hospital Benefit - a specified daily benefit (for no more than
1,000 days);
(iv) "Double Indemnity" - all benefits (except hospital stay) doubled,
if the injury arose whilst travelling on regular public transport or
in the burning of certain public places (cinemas, etc.).
(c) Exclusions: the normally applicable exclusions, which are commonly
found with personal accident covers, include:
(i) Self-inflicted injuries (including suicide, at any time);
(ii) War-related injuries;
(iii) Injuries whilst involved in illegal activities;
(iv) Disease or illness (unless caused by an accident);
(v) Childbirth & pregnancy;

(vi) Injuries resulting from hazardous sports (as defined).

3.3 ACCELERATED DEATH BENEFITS

The meaning of this is that when a policyowner-insured in a prescribed serious

situation, all or part of the death benefit under the policy may be payable to him,
although death has not yet occurred. Provisions for this are contained in an
accelerated death benefit rider (ADB rider), also known as a living benefit rider.
Common features with the different riders concerned are:

(a) Basic reasons: the benefits are released at times of great personal stress, under
grave and life-threatening circumstances. They are to assist with related
expenditure and to provide at least partial relief from the extra burden of
financial worry at times which are already grief-laden.

(b) Eligible plans: the riders are only likely to be permitted with policies having a
significant face amount for the sake of keeping administrative costs down.

(c) Beneficiaries: since pre-death payments to the policyowner-insured will have

an impact upon the expectations of the beneficiaries, some insurers will, in the
event of a claim under the rider, require the latter to sign a release (or release
form), acknowledging that the death benefit stands reduced by the amount of the
ADB payment.

3/6
(d) Assignees: if the policy has been assigned, the assignee must sign such a
release form, before an ADB is paid.

(e) Types of benefits: we shall consider two such accelerated death benefits,
namely the critical illness and the long-term care benefits.

3.3.1 Critical Illness Benefit

The basic features of this rider are:

(a) Meaning: a stated portion of the death benefit is paid to the

policyowner-insured when:

(i) he is diagnosed with a specified disease;

(ii) he is diagnosed with a terminal illness and has a life

expectancy of 12 months or less; or

(iii) it is necessary for him to undergo a specified medical

procedure.

(b) Specified diseases: the list of insured diseases is not identical

with all insurers, but they all can be categorised into the
following:

(i) cancer;

(ii) illnesses related to the heart;

(iii) disability;

(iv) illnesses related to a major organ;

(v) illnesses related to the nervous system;

(vi) illnesses related to the immune system;

(vii) others.

(c) Medical evidence: a statement from an attending physician is

necessary, confirming the condition and, in the case of a terminal
illness, the assessed life expectancy as well.

(d) Amount of benefit: this will vary between companies and depend
on the type of disease contracted, payment of the full death benefit
being a possibility. Critical illness benefit is invariably paid as a
lump sum.

(e) Restrictions: again, these are not universal, but typically they
may include:

3/7
 (i) critical illness cover is only available up to a specified age,
say, age 80;

(ii) critical illness cover is only available to standard risks;

(iii) payments may not be made for multiple/recurring events,

perhaps subject to exceptions with a couple of diseases;

(iv) waiting period: the diagnosis mentioned in (a) above has to

be one done when the rider has been in effect for a
specified number of days, say, 90 days.

(f) Premium waiver: some riders offer to waive all renewal

premiums due after say three months of meeting the incapacity
definition.

Note: A critical illness package policy comprising a death cover and a

critical illness cover is now widely available in Hong Kong, with both sharing
the same face amount. Yet critical illness benefit plans offering no death
benefit and critical illness benefit riders with death benefit are also available.

3.3.2 Long-Term Care (LTC) Benefit

This is not a very common product in Hong Kong at present, but the
basic features of this rider are:

(a) Meaning: a stated portion of the death benefit is payable to a

policyowner-insured who requires constant care for a condition.

(b) Types of care: these will be specified in the rider, e.g. to be cared for
either in an approved nursing home or in the policyowner-insured's home
by a duly authorised carer.

(c) Medical evidence: often the rider specifies that the care needs to be
medically necessary. Confirmation of this is not always easy.
Sometimes, the approval of the policyowner-insured's physician is
acceptable, but many insurers require that the policyowner-insured be
unable to perform a specified number of activities of daily living (ADLs)
before the need is established. (ADLs will include basic human needs
and functions, such as washing and dressing oneself, and mobility.)

(d) Amount of benefit: typically, this may be 2% of the death benefit per
month for nursing home care and 1% for home health care. The
maximum total payments may range between 50% and 100%.

(e) Waiting period: usually there is a 90-day waiting period before LTC
benefits are payable. Also, some insurers require the policy to have been
in force for one year or more before LTC benefits are payable.

3/8
 (f) Premium waiver: it is common for premiums to be waived, both for the
rider benefit and the basic insurance plan, during the period that LTC
benefits are being paid to the policyowner-insured.

3.4 MEDICAL BENEFITS

In earlier days, medical benefits would not be provided under life insurance
policies. Such cover was considered to be part of the "Accident" (Personal Accident)
portfolio. In more recent times, the boundary lines between various classes of business
have become less clearly marked. It is therefore quite common for life insurers to
consider medical benefits insurance part of their "insurances of the person" range of
products. Cover may be given as a rider to a life insurance policy, or separately as a
general insurance policy (for which type of insurance the insurer must of course be
duly authorised by the Insurance Authority (IA)).

A typical form of cover found in Hong Kong at present is very likely to include
most of the following features:

(a) Basic plan: Intended to cover the expenses related to medical treatment and
hospitalisation, the Basic Plan has a number of headings under which cover is
given, typically as follows:

(i) Hospital charges: these are very likely to have three different
categories, according to choice and premium paid, the usual descriptions
being Private Room, Semi-Private Room and Ward Bed. Cover includes
Room and Board, Miscellaneous Hospital Services and an available
supplement for Intensive Care treatment.

(ii) Private nursing: again with three categories, this includes nursing
treatment at home, in hospital by a qualified nurse or as recommended by
the attending medical practitioner.

(iii) Surgeon's, anaesthetist's and operating theatre fees: maximum benefit

/ cover is specified according to the three categories and the seriousness
of the operation involved.

(iv) In-patient physician's fees: for non-surgical cases.

(v) In-patient specialist's fees: for treatment, consultations, etc.

(vi) Out-patient follow-up care: within 6 weeks of hospital discharge.

(vii) Free worldwide assistance: a number of benefits and covers to help in

the event of emergency needs whilst abroad. These range from instant
telephone assistance to the return of mortal remains.

3/9
(b) Optional medical plan: various titles may be given to this option, available at
extra premium. The basic intention is to provide coverage for much increased
limits under the various headings and categories of the Basic Plan.

(c) Major exclusions: there are limits to the time during which various benefits
under the Basic and Other Plans may be paid, but these are part of the
description of cover. Specific exclusions are very likely to include the
following:

(i) Pre-existing conditions;

(ii) Pregnancy and childbirth related expenses;

(iii) Drug or other substance abuse, self-inflicted injury and sexually

transmitted diseases;

(iv) AIDS or HIV related conditions (sometimes only excluded for say the
first five years of the insurance);

(v) Congenital abnormalities treatment.

3.5 INSURABILITY BENEFITS

Insurability means that by normal underwriting and business standards a

particular risk is acceptable for insurance. The usual feature that affects this is, of
course, the health of the person who is to be the life insured. Checking whether a
person is insurable is a basic element in underwriting (see 5.3). Sometimes the
question of insurability, however, arises for an existing client (perhaps with policy
reinstatement - see 4.7 or on other occasions). This question, however, may be
avoided if the policy is made subject to the Guaranteed Insurability (GI) Benefit.

3.5.1 Guaranteed Insurability Option

The GI benefit is also referred to as a Guaranteed Purchase Option. The

basic features of this rider are:

(a) Meaning: the policyowner has the right to purchase additional insurance
(of course for an additional premium) on specified option dates, at
specified ages, or when a specified event happens, without having to
supply evidence of insurability.

(b) Limitations: the amount of additional cover may be limited (to the
existing policy's face amount, or less). Also the right must be exercised
before the life insured reaches a certain age (typically aged 40).

(c) Not automatic: if the policyowner does not effect the extra cover when
the right is triggered, that particular right is lost. He may, however,
exercise the right when the next turn comes, if any.

3/10
 (d) Specified event: the rider may specify the insured events as marriage,
the birth of a child, etc.

(e) Temporary cover: some insurers grant term insurance cover

automatically to cover the policyowner-insured during the period
allowed for exercising his purchase option, so that if he dies before
completing the option he will still have extra term insurance cover.

(f) Policy with WP: if the insurance also has a Disability Waiver of
Premium rider (see 3.1.1) and the policyowner-insured is disabled at the
time he is entitled to exercise an option for additional cover, the
additional cover will granted automatically. The WP rider also provides
for all premiums to be waived, until the recovery or death of the
policyowner-insured.

3.6 INFLATIONARY ADJUSTMENT

Inflation, which reduces the purchasing power of money, is an important

element to be considered with any long-term insurance linked to a specified face
amount. Bearing in mind that long-term policies may continue for many years,
perhaps a few decades, before they become payable, it will be realised that what was
once a significant amount may in real terms have been reduced to a small or even
trivial sum, because of inflation.

Clearly, this is a problem needing serious attention to the whole of one's life
insurance programme, but in the context of this Chapter on Benefit Riders, provision
has been made in relation to disability income benefits being paid, as follows:

3.6.1 Cost of Living Adjustment (COLA) Benefit

This rider or policy provision provides for periodic increases in the

disability income benefits being paid to disabled policyowner-insured. As the
name suggests, the increases are linked to increases in a recognised independent
index, such as the Composite Consumer Price Index.

-o-o-o-

3/11
 Representative Examination Questions

Type "A" Questions

1 The "waiting period" with a Disability Waiver of Premium rider means:

(a) a time period during which premiums are waived; .....

(b) the time allowed to a policyowner for payment of premium; .....
(c) the time period before a policy can be subject to this rider; .....
(d) a time period during disablement before premiums are waived. .....

[Answer may be found in 3.1.1]

2 A "Double Indemnity" provision under a life policy is incorrectly named

because:

(a) life policies are normally not subject to indemnity; .....

(b) the amount paid is not always double the face amount; .....
(c) it is only paid in the event of death through an accident; .....
(d) it is illegal for the beneficiary to be paid twice for the same event. .....

[Answer may be found in 3.2.1]

Type "B" Questions

3 Which of the following remarks are true concerning the AD&D rider?

(i) Loss of a limb may mean the actual loss of a limb, or loss of its use.
(ii) A sum equal to the death benefit is paid for the loss of one limb.
(iii) A sum equal to the death benefit is paid for the loss of two limbs.
(iv) Dismemberment benefits can also be for the loss of sight in an accident.

(a) (i) and (ii) only; .....

(b) (i) and (iii) only; .....
(c) (i), (iii) and (iv); .....
(d) (ii), (iii) and (iv). .....

[Answer may be found in 3.2.1]

3/12
4 Which three of the following are usually included within the insured events of
the Critical Illness Benefit?

(i) Disability
(ii) Illness related to the immune system
(iii) Influenza
(iv) Cancer

(a) (i), (ii) and (iii); .....

(b) (i), (ii) and (iv); .....
(c) (i), (iii) and (iv); .....
(d) (ii), (iii) and (iv). .....

[Answer may be found in 3.3.1]

[If still required, the answers may be found at the end of the Study Notes.]

3/13
4 EXPLAINING THE LIFE INSURANCE POLICY
It should be mentioned at the outset of this Chapter that the Hong Kong Life
Insurance market tends to use policy wording commonly found in the United States
and North America. The General Insurance market, on the other hand, mostly uses
policy styles originating in the U.K. For the purposes of this study (the Life Insurance
Policy), we shall follow the more common "U.S. style" policy provisions, making
appropriate comments relating to possible variations should a local insurer be using
U.K. style life insurance policy wording.

4.1 ENTIRE CONTRACT PROVISION

A Life Insurance Policy is a most important document. The contract is Long

Term, i.e. lasting many years, perhaps decades. Unlike with most other classes of
business, it is essential that the original policy document be presented when a claim is
made. The "entire contract" provisions are therefore very important. They provide
that:

(a) the entire contract consists of the policy, any attached riders and the attached
copy of the application (such an insurance contract being termed a closed
contract);

(b) only certain specified senior officials of the company are authorised to make
changes to the contract;

(c) no change to the contract will be effective unless made in writing; and

(d) no change to the contract can be made unless the policyowner agrees to it in
writing.

4.2 INCONTESTABILITY PROVISION

This means that within the terms of these provisions the validity of the contract
cannot be contested (challenged) by the insurer. Disputes over the validity of an
insurance contract may arise with an alleged breach of utmost good faith, i.e. certain
material facts have been omitted or misrepresented.

(a) The typical Incontestability Provision (or Incontestable Clause) states that
the insurer will not (normally - see below) contest the contract after it has been
in force during the lifetime of the life insured for two years from the date of
issue. (If the phrase ‘during the lifetime of the life insured’ was omitted and the
life insured died during the contestable period, the beneficiary might possibly
delay making a claim until the end of this period and seek protection of the
provision);

(b) Under Hong Kong law, an Incontestable Clause cannot be relied upon in the
event of fraud on the part of the claimant or the insured. Hong Kong law will
not support fraud, whatever a contract may say.

4/1
[Example: suppose a life insurance policy is arranged solely on the basis of
the health and other information declared by the policyowner-insured. He fails
to reveal certain material information such that a prudent underwriter would
not have insured him. The man dies after three years. Under the normal rules
of Utmost Good Faith, the insurer could avoid the contract. Nevertheless, it
cannot do that because of the overriding effect of the incontestability provision.
However, if the policyowner’s failure constitutes a fraudulent breach of the duty
of utmost good faith, the insurer may disregard the provision and avoid the
contract if the applicable law is that of Hong Kong.]
Case 6 The Incontestability Provision often serves as an effective shield
against an insurer’s attempt to repudiate liability on the basis
of breach of the duty of utmost good faith
The policyowner died of nasopharyngeal carcinoma three years after he had
effected a life policy. It was revealed that he attended a medical examination
by the insurer's medical officer in the morning four days after he had signed
an insurance application. In the afternoon of the same day, the insured
consulted a private doctor, complaining of swelling of right neck gland and
blood in post-nasal drip sputum for one month. The diagnosis of
nasopharyngeal carcinoma was suggested. However, the insured failed to
disclose any of the above symptoms on the application form or during the
medical examination. The insurer therefore refused to pay the death benefit
on grounds of material non-disclosure.
The wife of the policyowner stressed that her husband consulted the private
doctor just because he did not feel well that afternoon. The consultation was
not a pre-scheduled appointment. As the insured often contracted flu and cold
in the previous months and his symptoms were very similar to those of flu
and cold, he, not being a medical expert, believed himself to be suffering
from flu and cold again. Moreover, he disclosed on the application form that
he had previously suffered from flu and cold and had recovered after taking
medicine. This served to prove that he had fully disclosed all his medical
information to the best of his knowledge at the time of the insurance
application.
The Complaints Panel noted that the questions on the application form that
related to the alleged non-disclosure specifically asked about "disease"
suffered or treated for. Although the policyowner presented himself as a
result of certain symptoms, there was no evidence suggesting that he had
failed to disclose on the application form a known or diagnosed disease.
Therefore the Complaints Panel was convinced that the insured had honestly
completed the application.

Further, the Complaints Panel found no warning clause on the application

form that had imposed on the policyowner an obligation to notify the insurer
of changes in his health condition occurring after signing the application
form and before issuance of the policy, which condition in this instance
deteriorated soon after the application was signed.

4/2
 More importantly, there is a two-year contestable period applicable to life
insurance policies, beyond which a policy cannot be rescinded unless fraud is
proven. The policyowner passed away more than two years after his
insurance policy came in force. As no evidence had been put forward to the
Complaints Panel to suggest the presence of fraud, the Complaints Panel
concluded that the incontestability provision should be invoked.

Based on the above, the Complaints Panel ruled in favour of the claimant and
awarded her the death benefit.

Remarks: The claimant won her case on two alternative major grounds.
Firstly, the Complaints Panel decided that the policyowner had not been in
breach of the duty of utmost good faith. At law, the proposer is only required
to disclose such material facts that he actually knows or ought to know.
Apparently the Complaints Panel considered that the symptoms that the
policyowner had at the time when he was signing the application form or
undergoing the medical examination would not constitute material facts that
he actually knew or ought to know. In addition, unless varied by private
agreement, the duty of disclosure extinguishes as soon as the insurance
contract is concluded. The Complaints Panel was apparently of the view that
the subject insurance contract was concluded when the application was
signed – not when the policy was issued, so that the diagnosis shortly after
that critical moment, even though being material facts, would not be required
to be disclosed to the insurer. Second, even if breach of the duty of utmost
good faith on the part of the policyowner had been established, he should be
allowed to take advantage of the Incontestability Provision unless fraud
could be proved against him.

(c) Such a clause would not have the effect of preventing the insurer from raising
the question of illegality, e.g. for lack of insurable interest.

(d) An Indisputable Clause (the UK equivalent of the Incontestability

Provision) has been held by the English courts to be incapable of preventing an
insurer from avoiding liability on grounds of negligent misrepresentation on the
part of the insured unless the clause expressly mentions negligence or the clause
does not otherwise make sense.

4.3 GRACE PERIOD

Under U.K. style policies, this is also called "Days of Grace". Essentially, this
relates to a period of time after the date on which a premium is due, when cover is kept
operative. But for this grace period provision, the policy would lapse if the premium
is not paid by the due date. So it allows for a late payment of premium without
penalty. The features of these provisions are:

4/3
(a) the grace period is usually a minimum of 30 or 31 days;

(b) the grace period does not apply to the initial premium for the policy;

(c) payment of premium within the grace period is deemed to be payment on time;

(d) this is not a period of free insurance; for example:

(i) if the life insured dies within the grace period before payment of the
premium, the premium due will be deducted from the death benefit
payable;

(ii) if the life insured survives the grace period without paying the premium
due (and subject to any other policy provisions, such as nonforfeiture, see
4.5 below), a U.K. style policy will lapse from the date the premium was
due, whereas a U.S. style policy will lapse at the end of the grace period
(giving rise to “free insurance” for one month).

(e) special provisions may arise with non-traditional types of policy, e.g. universal
life policy.

4.4 BENEFICIARY DESIGNATION

A beneficiary is a person to whom the policyowner of a life policy instructs the
insurer to pay the death benefit when it is due. A fundamental condition for the
payment is that the beneficiary must survive the life insured. In practice, there are
various types of designations and beneficiaries:

(a) The beneficiary is usually named in the policy. But class designations (i.e.
identification of a certain group of people as beneficiaries instead of naming
each of the persons) can alternatively be done. Examples of class designation
include "my children", and "my brothers and sisters".

(b) The primary (or first) beneficiary receives the death benefit, when payable (if
more than one is designated, shares will be equal unless otherwise specified in
the policy). One or more Contingent Beneficiaries may be designated in
addition to primary beneficiaries, in case all the primary beneficiaries do not
survive the life insured.

(c) A life policy usually allows the policyowner to change the beneficiary
designation whilst the policy is in force, in which case the designated
beneficiary is called a "revocable beneficiary". Alternatively, he may have a
provision included in the policy making the designation irrevocable so that a
change of beneficiary will require the written consent of the current beneficiary.
Turning back to the usual policy wording, which allows a beneficiary
designation to be revoked, equity will not allow the act of naming a substitute
beneficiary in such a policy to prejudice any vested, beneficial interest of the
original beneficiary, even if such an act is strictly within the terms of the
contract. For instance, effecting a life insurance policy for the benefit of the
policyholder’s spouse and/or any of his or her children will have the effect of

4/4
 creating a (statutory) trust under the Married Persons’ Status Ordinance, so that
the spouse and/or the children will become beneficial owners of the policy, with
the policyowner as the trustee. Under the strong protection of equity, these
beneficial interests can simply be viewed as gifts (or “gifts inter vivos”, to be
more precise, with “inter vivos” meaning “among living people”) that even the
donor (policyowner) himself cannot take back! This is because these interests
are now parts of the respective estate of the beneficiaries, whether or not the
beneficiaries will survive the life insured being irrelevant.

(d) The wording of the typical beneficiary designation provision is apparently

simple, giving rise to a general belief that any payable death benefit will
certainly be paid to the beneficiary. In fact, a situation of conflicting claims
may arise, possibly from policy beneficiaries, assignees, trustees of the policy,
trust beneficiaries, trustees-in-bankruptcy, and personal representatives. An
insurer in such a situation will face the risk of having to pay claims twice by
taking it for granted that the beneficiary designation provision is paramount.

4.5 NONFORFEITURE BENEFITS

Most conventional life insurance plans (other than term insurance plans)
acquire a cash value after an initial period in force. That cash value is important for a
number of reasons, discussed elsewhere in these Study Notes, and has special
relevance to the question of nonforfeiture. If something is "forfeited", it means that it
is lost or rights to it are taken away. "Nonforfeiture" therefore means that rights are
not lost under certain circumstances, in this instance the discontinuance of premium
payments.

Without specific provisions to the contrary, the policy will lapse if the premium
is not paid within the grace period. The customary nonforfeiture provision is that:

(a) the policy does not lapse because of non-payment of premium. Unless
instructions are received to the contrary, the cash value of the policy is used to
pay due premiums for as long as the cash value lasts, keeping the policy in force
for the full amount;

Note: Some insurers do not regard this as a nonforfeiture benefit, but treat it as
a quite separate policy provision known as an automatic premium loan (APL)
provision.

(b) the owner of a policy which has a cash value or dividend value, who decides not
to pay any more premiums, may exercise any one of the following options:

(i) cash surrender value (also known as surrender value): the cash
surrender value is paid when the policyowner terminates the policy;

(ii) reduced paid-up insurance: the net cash value is used as a single
premium to purchase life insurance of the same plan as the original
policy for a lower amount of cover;

4/5
 (iii) extended term insurance: the net cash value is used as a single premium
to purchase term insurance for the same amount as the original face
amount, for such period as the net cash value can provide.

Note: These options arise when the insurer receives notice of a decision to
discontinue premium payments. If premium payments merely stop, with no
notice of selection from the policyowner, the automatic provision in (a) above,
if any, will be triggered. Those policies that haveno such clause often provide
that option (b)(iii) above should apply automatically if the policyowner has
failed to choose one of the options.

4.6 POLICY LOAN

Another feature directly arising from the existence of a policy cash value, is the
facility of borrowing money from the insurer, using the cash value as security. The
concept arises with the APL feature mentioned in 4.5(a) above, but the customary
Policy Loan provisions are:

(a) the policyowner has a right to borrow money from the insurer;

(b) the loan may be for any purpose;

(c) the loan may be up to the policy cash value (less one year's loan interest);

(d) the only security required for the loan is the policy cash value;

(e) the applicable interest rate may be subject to a prescribed maximum;

(f) the amount and timing of any repayments are at the discretion of the
policyowner, and any unpaid interests will become part of the policy loan;

(g) the amount of any outstanding loan (including any unpaid interests) will be
deducted from the death benefit or surrender value that is payable.

4.7 REINSTATEMENT

Under U.K. life insurance practice, this is also known as "Policy Revival".
The concept is that a policy which has lapsed ("died") can be brought back to "life"
under certain circumstances. Of course, this can always happen by the mutual consent
of the insurer and the policyowner. The term "reinstatement", however, in this context
concerns the right of the policyowner to have a lapsed policy brought back into force.
The usual policy provisions which apply to this are:

(a) there is a time limit within which this may be demanded;

(b) that period during which the right can be exercised may vary between insurers,
but 5 years is quite representative;

(c) the right normally applies only to lapsed (not surrendered) policies;

4/6
(d) the reinstatement may be subject to any of the following conditions:
(i) evidence of continued insurability (good health);
(ii) repayment of any outstanding loan (inclusive of interests);
(iii) payment of back premiums, plus interests thereon to be charged at a
prescribed rate;
(iv) payment of a reinstatement fee;
(v) a further contestable period (see 4.2) from the reinstatement date;
(vi) a further suicide exclusion period (see 4.12) from the reinstatement date.

4.8 MISSTATEMENT OF AGE OR SEX

Please note that this is a misstatement of age or sex. In the event of a voluntary
sex change operation to an existing life insured, the advice of the insurer concerned
should be obtained.

Obviously, a different age or sex from that indicated when the insurance was
arranged can have a significant impact on the policy premium and/or benefit. The
customary provisions in these circumstances are:

(a) If the error is discovered after a claim has arisen: the amount of the benefit
payable is adjusted (up or down) to reflect the amount payable had the correct
age/sex been given and the same premium paid.

Note: If the insurer follows the commonest practice in the U.K. on this issue,
any benefit adjustment could only be downward. If the age/sex mistake
indicates that too much premium has been paid, the overpaid premium will be
refunded (without interest) without an upward adjustment to the benefit
payable. Again, this might be a point to check with any insurer using U.K.
policy forms, etc.

(b) If the error is discovered before a claim arises: the policyowner is usually given
the choice of:

(i) leaving the face amount unchanged and either receiving a refund
premium or paying an extra premium after calculating the correct
premium that should have been paid; or

(ii) adjusting the face amount of the policy to the amount which the premium
paid would have purchased at the correct age or sex.

Note: The U.K. practice on this point will be the same.

4/7
4.9 ASSIGNMENT

Section 9 of the Law Amendment and Reform (Consolidation) Ordinance

allows the assignment of a legal chose in action (see Glossary) by following a
prescribed formality, with interests in an insurance contract constituting choses in
action. Among the criteria for a valid legal assignment is one that the chose in action
to be assigned must be present, not future; and it has been held that interests in a life
insurance contract are present and are capable of assignment. As an alternative to the
‘present’ description, it is said that interests in a life insurance contract are
reversionary, that is to say, even though the policyowner’s rights under the contract are
unquestionably recognised, the actual enjoyment of the insurance is deferred until
some date or event in the future. When an assignment happens or is attempted, the
policyowner is termed the ‘assignor’ and the person on the other side of the deal the
‘assignee’. Assignment can be performed so as to execute a contract or a gift.

Certain features of assignment that we should note, arising from policy

provisions and otherwise, are as follows:

(a) Notice of assignment: an assignment is valid from the date of notice given to
the insurer. A typical life insurance policy contains an assignment provision,
which, without intending to prevent an assignment, says that the insurer is not
bound to act in accordance with an assignment until it receives a written notice
of it.

(b) Validity of an assignment: the said assignment provision disclaims insurer’s

responsibility for this; this implicitly is saying that the assignor should seek
independent legal advice on the formalities required for a valid assignment.

(c) Rights of the assignee: the assignee inherits from the assignor all his rights and
remedies upon a valid assignment. However, the assignee cannot recover more
than the assignor, so that where an assignor has purchased insurance by fraud or
misrepresentation, the insurer can set up a defence against the assignee.
Besides, the insurer can enforce against the assignee any of its right to set off
against the assignor, so that when any policy benefit is payable to the assignee
any overdue premiums from the assignor and outstanding policy loans to the
assignor together with interests thereon will be deducted from the benefit, in
which case the assignee is said to receive the net policy proceeds.

(d) Assignment is of benefit, not burden: the laws do not allow a person to assign
to another person an obligation that he owes to a third person (e.g. an obligation
to pay insurance premiums) without the third person’s consent.

(e) Limitations on assignment: an assignment

(i) must not violate any vested right of any beneficiary (especially of any
irrevocable beneficiary - one that cannot be changed without his
consent). It is important to note that through a revocable beneficiary
designation, what the designated beneficiary will acquire is a mere
expectation to receive benefit, as opposed to a vested right or interest;

(ii) must not be for illegal purposes (e.g. money laundering);

4/8
 (iii) may be restricted to involve only a lump sum payment of policy benefit
to the assignee, i.e. no other settlement options.

(f) Types of assignment: life insurers categorise assignment into two types:

(i) absolute assignment: where all ownership rights under a life insurance
contract are irrevocably assigned, such an assignment is termed an
absolute assignment;

(ii) collateral assignment: the arrangement is temporary, usually where the

policy is used as collateral security for a loan (not from the insurer).
The terms of such an assignment limit the assignee's interest to the loan
plus interests thereon, and give the assignor a right of reversion once the
loan is repaid in full. The assignor is not entitled to acquire a policy
loan or surrender the policy whilst a notified collateral assignment is in
force.

4.10 DIVIDEND OPTIONS

Participating policies (known in the U.K. as "with-profit" policies), in due time,
should qualify for dividends, which are distributed in three ways: cash dividend,
reversionary bonus and terminal bonus (see 5.2.7). Cash dividends become payable
to the participating policyowner immediately. However, the policy normally presents
some options in respect of cash dividends, so that they may be:

(a) paid in cash at once;

(b) applied towards future premiums of the policy;

(c) left with the insurer to earn interest (note: dividend deposit (inclusive of the
interests thereon) is distinct from cash value);

(d) used to buy paid-up additional insurance, which will generate dividends as well;

(e) used to purchase one-year term insurance.

Note: If the policyowner makes no selection from the available options, most policies
make provision for what is known as an automatic dividend option to apply. In Hong
Kong, practice seems to vary, but the likely alternative applications are:

(i) option (c) above, leaving the dividends with the insurer to earn interest; or

(ii) option (d) above, the purchase of paid-up additional insurance.

Insurance intermediaries should check with the insurers.

4/9
4.11 SETTLEMENT OPTIONS

When the policy benefit becomes payable, the beneficiary and/or policyowner
may choose between several alternative methods of receiving the proceeds
(“settlement options” or “optional modes of settlement”). These are:

(a) a lump-sum settlement: a single payment, to complete the whole contract;

(b) an interest option: the policy proceeds are left with the insurer, who pays
interest annually or at agreed more frequent intervals;
(c) a fixed period option: the policy proceeds (and interests) are paid in instalments
of equal amounts over an agreed period of time - effectively this is an option of
purchasing an annuity certain with the policy proceeds as a single premium;
(d) a fixed amount option: the insurer pays equal instalments of a stated amount for
as long as the policy proceeds (and interests) last;
(e) a life income option: the policy proceeds (and interests) are paid in agreed
instalments over the payee’s lifetime - effectively this is an option of purchasing
a life annuity (see 2.3.1(c)) with the policy proceeds as a single premium.
Under this method, the payee should expect smaller instalment payments than
would be available under the fixed period or fixed amount option.

4.12 SUICIDE EXCLUSION

One of the features of life insurance is that the benefit may be payable even if
the cause of the claim was the deliberate act of the life insured. This arises from the
underlying reason for life insurance, which originally was primarily to make provision
for dependants, rather than to benefit the life insured personally.

With a long term contract and under those circumstances, it would be unfair to
penalise the family in the tragic event of the life insured taking his own life. On the
other hand, certain safeguards against the effecting of life insurance with suicide in
mind are perfectly reasonable. The usual provisions are:
(a) suicide is excluded for an initial period of the policy;
(b) that period may vary with insurers, but 1 year after the date the policy is issued
is very representative;
(c) should suicide occur after that period, the death benefit is payable as normal;
(d) should suicide occur during that period, the death benefit is not payable, but it is
normal for the policy to state that premiums paid (less any outstanding loan and
interests) are refunded.
Note: 1 Being a policy exclusion, it is for the insurer to prove that death
was by suicide - not always an easy thing to do.
2 Bearing in mind the overall intention of the exclusion (to defeat
arranging a policy when suicide was contemplated), it is not unknown
4/10
for an insurer to pay for a proved suicide which can reasonably be
assumed to be attributable to events arising after the policy
commenced, and which will otherwise be caught by the exclusion. Of
course, this would be ex gratia payment (i.e. not legally required) and
the circumstances would have to be quite unusual.
3 Suicide was but is no longer criminal.

-o-o-o-

4/11
 Representative Examination Questions

Type "A" Questions

1 Under "The Entire Contract" provision, changes to the contract:

(a) cannot be made at all; .....

(b) can be done only if the policyowner agrees; .....
(c) can be done if the policyowner requests it; .....
(d) can be made if senior officials of the insurer say so. .....

[Answer may be found in 4.1]

2 A "Grace Period" is also known as:

(a) days of grace; .....

(b) the cooling-off period; .....
(c) the nonforfeiture clause; .....
(d) the payment of benefit period. .....

[Answer may be found in 4.3]

Type "B" Questions

3 Which of the following are nonforfeiture options?

(i) Cash surrender value

(ii) A lump-sum settlement
(iii) Extended term insurance
(iv) Reduced paid-up insurance

(a) (i) and (ii) only; .....

(b) (i), (ii) and (iii) only; .....
(c) (i), (iii) and (iv) only; .....
(d) (i), (ii), (iii) and (iv). .....

[Answer may be found in 4.5]

4/12
4 Which of the following are dividend options?

(i) Cash payment

(ii) Left with insurer to earn interest
(iii) Used to buy paid-up additional insurance
(iv) Used to purchase one-year term insurance cover

(a) (i), (ii) and (iii) only; .....

(b) (i), (iii) and (iv) only; .....
(c) (ii), (iii) and (iv) only; .....
(d) (i), (ii), (iii) and (iv). .....

[Answer may be found in 4.10]

[If still required, the answers may be found at the end of the Study Notes.]

4/13
5 LIFE INSURANCE PROCEDURES

5.1 COMPANY OPERATION

The way a company operates is determined by the company itself and there is
no set pattern or formal structure that must be adopted. Therefore, the following
comments are only representative of a company's operations. Before looking at the
internal organisation of a typical life insurer, however, we should just mention two
important types of company, according to their constitutional basis:

(a) Mutual insurance companies: a mutual insurance company has no

shareholders. Legally, it is owned by its participating policyholders (i.e.
owners of participating policies (see 1.3.1b(a))), and controlled by its Board of
Directors and senior management. Being a mutual has certain advantages,
especially for policyholders, who do not have to share company profits with
shareholders. It has certain disadvantages as well, particularly with regard to
the raising of new equity capital, should this be required.

Note: The fact that a company has the word "Mutual" in its title is not
conclusive evidence that it is a "mutual", as defined above. Whilst this may
well be the case, and all companies having "Mutual" in their title undoubtedly
began as such a business unit, some "mutuals" world-wide have de-mutualised,
changing their constitutional status, to become as below.

(b) Proprietary or stock companies: these companies are much more common
business structures, consisting of a limited liability company owned by its
shareholders. "Limited liability" means that the shareholders cannot be
compelled to contribute anything further towards company losses or capital
requirements once their shares are "fully paid-up".

5.1.1 Typical Company Operational Structure

Since company structures cover a great number of inter-related activities

and there is no set pattern to follow, we shall briefly mention various
departments or functions, in alphabetical order only:

(a) Accounts department: according to company policy and structures, an

Accounts department may represent the relatively routine (but
important) role of bookkeeping and financial record maintenance, or
(more likely) it will include Management Accounting, with
responsibilities in the key areas of budgeting and investment, etc.
Standard functions of the Accounts Department include:

(i) Receipts: monitoring and recording all payments due to the

company, by way of premiums, reinsurance recoveries, loan
repayments, etc.

5/1
 (ii) Payments: monitoring and recording all payments to be made by
the company, including claims, salaries, agency commissions,
purchases, etc.

(iii) Financial returns: every insurer must submit audited accounts

each year, as required by the Insurance Ordinance. This is a
major function and responsibility of the Accounts department.

(b) Actuarial department: as mentioned before, life insurance is

profoundly involved with mathematical calculations and projections.
The actuarial department therefore has a key role in company operations,
its involvement including:

(i) Product pricing: probably sub-divided between the various major

types of product offered, e.g. Individual Life, Group Life, Health,
Personal Accident and Retirement Benefits.

(ii) Valuation: a core function, required by statute, valuation consists

of the calculation of the values of assets and liabilities. The way
this is done is critical to the solvency margin of the company and
the determination of the divisible surplus, from which dividends
or bonuses can be declared. (It is the Board of Directors that
makes the actual decisions on declaration of dividends or
bonuses.)

(iii) Claims and reinsurance: calculations and projections of reserves

and needs in these areas are obviously of great importance.

(iv) Management reporting: this could be within the area of the

company accounting staff, but whoever performs the function, it
is a critical one. Unless top management are supplied with
reliable data on reserves, surpluses and other key matters,
effectively the company cannot operate (at least not efficiently,
and that probably means "not for long"!).

(c) Agency training and control: the majority of individual life insurance
plans are sold through insurance agents. They at one and the same time
represent almost the "lifeblood" of the company, and a major
responsibility regarding their appointment, training and discipline.
Details of requirements are given elsewhere in these and other Study
Notes, but very important matters in this area include:

(i) Training programmes: arranging, organising and administering,

with all the logistics and personnel details involved.

(ii) Examinations: both with regard to their being accepted as

insurance intermediaries (this Insurance Intermediaries Quality
Assurance Scheme, for example) and other professional
qualifications.

5/2
 (iii) Resources and facilities: the provision of suitable materials,
premises and opportunities for training and career development
has obvious applications.

(d) Claims: without claims we have no business! Perhaps a slight

oversimplification, but there is truth in the remark. This important area
includes:

(i) Routine administration: all the required enquiries, checking and

general supervision to confirm all is in order.

(ii) Various types of claim: such as death claims, maturities and

surrenders, which may require different kinds of expertise.

(iii) Investigative work: sometimes detailed forensic or other enquiries

need to be made in verifying the validity of a claim.

(e) Client service (also known as policyowner service: see 5.5): This
involves a variety of functions, including:

(i) Changes to policies: these may relate to financial or non-

financial changes, all of which are important to efficiency.

(ii) Communication: this will involve both correspondence and

telephone/personal enquiries, and complaints.

(iii) Documentation: policy duplicates (with all attendant checks and

enquiries) and other document requests.

(iv) Policy renewals: the important process relating to the retention of

business.

(f) Marketing: This is a general term that can signify many things. It
usually includes:

(i) Product research: and development of new products.

(ii) Promotions/publicity: producing the materials and physically

attending to all logistic and other details involved.

(iii) Advertising: closely related to (ii) but with special features such as
media involvement and sponsoring.

(iv) Public relations: news conferences, media interviews, public talks

and seminars, for example.

(v) Market research: examining needs, demands and results.

5/3
 (g) Underwriting: this is considered as a technical exercise in 5.3 below,
but as an element in company operations this department includes:

(i) Risk assessment: the technical matter of risk selection, rating and
imposing terms, as necessary.

(ii) Medical requirements: arranging and monitoring such medical

examinations and related documentation as may be required.

(iii) Reinsurance: the extent to which reinsurance may be required or

arranged with individual risks.

Note: The above departments are representative, as previously mentioned.

They do not form a comprehensive list and are not intended to represent the
operational structure of any particular insurer.

5.2 APPLICATION

Some insurers might refer to an application as a proposal. Either term may be

found in the Hong Kong market, although "application" is perhaps more widely used.
Both refer to the request for insurance cover from an intending policyowner. A
number of significant issues and considerations are involved with this important
matter, made more important by the fact that a life insurance contract cannot be
cancelled by the insurer once it becomes operative.

5.2.1 Application Procedure

Competition and the desire for efficiency have led to questions on the
application being kept to the minimum. Often, questions are phrased so that a
"No" answer means that no further enquiry needs to be made in that topic,
whereas a "Yes" answer may need further details or enquiry.

(a) General rules for application procedures: the application/proposal is

the main, and sometimes virtually the only, source of information for
underwriting purposes. The insurance intermediary should therefore take
great care in his advice and general assistance to the client when the form
is being completed, noting the following:

(i) All material facts should be given. "Yes" answers in response to

enquiries on health and other matters must be accompanied by
full explanations, including any relevant dates (see: 1.2.2).
(ii) Normally the applicant should complete the form personally.
Sometimes the insurance intermediary is asked to assist by
writing things at the client's dictation. Great care must be taken
with this, to ensure that the client realises that the form is his
statement and the answers are his.

5/4
 (iii) Alterations and amendments should be avoided, if possible. If
not, they must be very clear. Anything incorrect must be clearly
crossed through or deleted and the alteration should be signed
and dated by the applicant. (A replacement form may be
advisable in many cases.)

(iv) All questions should be answered, as fully as required. Failure to

observe this rule can only result in delay. Information with life
insurance is too important to be waived.

(b) Key points to be considered: Some areas requiring special attention

include:

(i) The desired commencement date should be clearly indicated. It

is normal for insurers to allow a policy to be back-dated for a
certain period (which may vary with the insurer concerned).

(ii) The identity of the applicant and life to be insured is important to

establish. Any available Identity Card (or equivalent document
of identification) should be inspected by the agent (some insurers
require a copy to be attached to the application).

(iii) Age next (or sometimes last) birthday is an important element

affecting the premium. Sometimes in Hong Kong this may not be
easy to establish. It is not uncommon to find that only the year of
birth is known. In that event, cautious insurers are very likely to
regard the birthday as being the 1st January that year.

(iv) Other personal details, including occupation, residential address

and family medical history all have a significance which is self-
explanatory.

(v) Signature of both the applicant and the life to be insured (if
different) must be obtained. If an intended signatory cannot
write, an appropriate mark or chop is acceptable, but this must be
witnessed by two persons (one of whom may be the insurance
intermediary).

(c) Supplementary requirements: these may involve a number of issues,

detailed instructions about which will be supplied by the insurer. Some
areas likely to be involved, however, include such matters as:

(i) Life underwriter's report: signed by the insurance intermediary,

and including the reason for the purchase and the length of his
acquaintance with the client.

(ii) Mode of premium payment: whether autopay facilities apply.

(iii) Proof of insurability: establishment of an insurable interest.

5/5
 (iv) Underwriting forms: additional questionnaires for "Yes" replies
relating to certain conditions, or other matters (e.g. hazardous
sports).

5.2.2 Receipts and Policy Effectiveness

The fact that a life insurance policy cannot be cancelled by the insurer
once it has commenced is a matter of recurring importance. In connection with
receipts issued by insurers, for example, in Non-Life insurance a receipt is
merely an acknowledgement that some money has been received. This is not
inevitably connected with the inception date of the insurance, which could have
already commenced some time ago, or could be intended to commence in the
future. Moreover, even if the (Non-Life) policy has commenced, there is usually
a policy condition allowing cancellation if need be. Not so with Life
Insurance.

In life insurance, a premium receipt is a written acknowledgment that an

insurer has received the initial premium submitted with an application for
insurance. There are two types of premium receipt which are in common use:

(a) Conditional premium receipt: with this type of receipt, the insurer
agrees that the insurance will commence at the time of application. BUT
this is true only provided that the applicant is subsequently found to
have been insurable on standard terms at the time of application. Two
things follow from this:

(i) if the applicant is found to be insurable, but only for a different

plan, premium or amount of cover, then the insurance is not
effective from the date of application. Technically, we may say
that the offer has not been accepted on its exact terms, so the
contract does not commence until any revised terms have been
agreed;

(ii) if the applicant, subsequent to the application becomes

uninsurable or even dies he is covered provided he is found to
have been insurable at the time of application.

(b) Binding premium receipt: this may be known by other names, such as
a Temporary Insurance Agreement (TIA) or an Unconditional Premium
Receipt. Whatever the title used, the basic features surrounding such a
receipt are:

(i) this represents a contract, separate from any subsequent

insurance policy that may be issued;

(ii) cover begins from the date the application was signed and the
date that the premium was paid;

5/6
 (iii) cover is not conditional upon the applicant subsequently proving
to be, or to have been, insurable; but

(iv) cover is limited to a maximum specified number of days (say 60

or 90 days);

(v) the cover may terminate earlier than the final day of the period
specified:

(1) from the date the insurer returns the premium;

(2) a specified number of days after mailing a notice of

termination to the applicant;
(3) from the date when coverage begins under the issued
policy.
Note: In Non-Life insurance a similar document is used to give
temporary, unconditional but cancellable cover. There it is called a
Cover Note, although it is usually only for 30 days cover and may or
may not be conditional upon any premium payment.

5.2.3 Client Service - Policies and Standards

Client service has been described as the range of activities a company

engages in to keep its customers satisfied.

5.2.3a The Importance of Client Service

This may have a number of considerations, including the

following:
(a) Customer loyalty: the customer who is happy with you tends to
stay with you. Continuity and the conservation of business are
very important in life insurance, where the most of the costs and
expenses are "up front" (when the policy is first arranged).

(b) Customer "prospecting": "prospecting" may be described as the

search for new customers. If existing customers are happy with
you, they immediately become your "unpaid prospectors" with
their friends and families.

(c) Productivity/Profitability: quality service leads to fewer mistakes

and fewer complaints. That in itself means that effort can be
directed to more productive activity, with its consequent impact
on profitability.

5/7
 5.2.3b How to Achieve Quality Client Service

There is no simple answer to this, but certainly the following will

greatly assist in achieving desired goals in this area:

(a) Corporate culture: this should always be customer-orientated.

(b) Delegation: of adequate and appropriate authority and

accountability to front-line employees.

(c) Systems: should be created to monitor customer satisfaction.

(d) Training: and technology appropriate to these goals should be

available.

Note: The above recommendations apply primarily to the insurer, but

the underlying principles are easily adapted and applicable to insurance
intermediaries.

5.2.4 Cooling-Off Period

One of the popular conceptions, and certainly a popular fear in the

general public, is that life insurance salesmen may be too assertive, even
aggressive, in their selling. The perceived result from this could be that a
person might be pressurised into purchasing a life insurance that he does not
really want, or cannot really afford.

To counteract this perceived possibility, the Hong Kong Federation of

Insurers (HKFI) has issued a code of practice called the “Cooling-off Initiative”
for compliance by its life insurance members (LIMs), with the following major
provisions :

(a) Policyholders are given a period (called a "Cooling-off Period")

during which they may reflect and if they wish change their mind
about a life insurance policy that they have purchased or applied
for.

(b) Such rights apply to purchases of new individual life insurance

policies, whether linked or non-linked. To avoid possible doubt,
certain transactions are stated to be beyond the scope of
application, e.g. new riders added to existing life policies and
conversions of life insurance plans.

(c) The Cooling-off Period is 21 days after the delivery of the policy
or issue of a Notice (see (d) below) to the policyholder or the
policyholder’s representative, whichever is the earlier.

5/8
(d) The Notice is to inform the policyholder of the availability of the
policy and the expiry date of the Cooling-off Period. It reminds
the policyholder that he has the right to re-think his decision to
purchase the life insurance product and to obtain a refund of the
premiums paid if the policy is cancelled within the Cooling-off
Period. It also reminds the policyholder to contact the Customer
Service Department of the insurer directly (service hotline number
should be provided) if he does not receive the policy within 9
days from the issue date of the Notice.

(e) LIMs have to keep a copy of the Notice or acknowledgement of

receipt of policy delivery. In case of a reasonable complaint or
dispute, they will be required to produce evidence to show that the
Notice or policy has been delivered.

(f) LIMs are advised to:

(i) specify in their training materials for insurance

intermediaries and internal guidelines that insurance
intermediaries have to:
a. inform prospective policyholders of their Cooling-
off rights and the expiry date of the Cooling-off
Period when they sign their policy application forms;
and

b. make all reasonable endeavour to deliver policies to

the policyholders within a period of time
consistent with (d) above and (f)(ii) below after the
policies are issued if they are obliged to deliver
policies on behalf of the insurers.

(ii) devise internal control measures which will ensure and

prove that:

a. policies are delivered no later than 9 days after the

policy issue date; or

b. a Notice to inform policyholders of the availability

of the policies and the expiry date of the Cooling-off
Period is issued no later than 9 days from the policy
issue date;
and

(iii) maintain records in respect of complaints or disputes for

cases where clients seek refunds outside the Cooling-off
Period but are refused by the insurer and to provide these
records to the HKFI upon request.

5/9
 (g) Subject to the provisions below, policyholders have the rights to
cancel new policies within the Cooling-off Period and obtain a
refund of the premium(s) paid:

a. For all non-linked policies other than non-linked single

premium policies, the refund is 100% of the premiums paid.

b. For all linked policies and all non-linked single premium

life insurance policies, the insurer has the right to apply a
"market value adjustment" (MVA) to the refund of
premiums.

c. Any such MVA has to be calculated solely with reference

to the loss the insurer might make in realising the value of
any assets acquired through investment of the premiums
made under the life policy. It should therefore not include
any allowance for expenses or commissions in connection
with the issuance of the contract.

d. In the case of a linked policy, the insurer's right to apply an

MVA has to be disclosed in the Principal Brochure, and
the basis of calculation must be available for disclosure to
the potential policyholder prior to the completion of the
application form.

e. For non-linked single premium policies, potential

policyholders have to be made aware that the insurer has
the right to apply an MVA before they sign the application.
This may be done by letter, or within the product brochure.

(h) A statement announcing the availability of Cooling-off Rights has

to be included on the application form immediately above the
space for the signature.

(i) When the policy is issued, the policyholders have to be reminded

of the Cooling-off Rights attaching to the policy. This may be
done by way of a letter from the insurer, mailed direct to the
policyholders, or a statement on the policy jacket or policy cover.

5.2.5 Policy Switching

With a competitive and innovative market, obviously there can be

genuine and quite legitimate cases where an insurance intermediary can in all
conscience recommend a client to change his present life insurance policy to
one offering better terms or prospects. Such an activity will meet the approval
of all unbiased people and create no problem for regulators. But that which
does not comply with the above criteria is a matter of profound concern. To
address this concern, the HKFI has issued the "Code of Practice for Life
Insurance Replacement" ("the Code"), which we should study in some detail, to

5/10
prevent ‘twisting’ by insurance agents, insurance brokers, and their responsible
officers/chief executives and technical representatives.

(a) "Twisting" defined: The Code defines twisting as:

"the making of inaccurate or misleading statements or comparisons to

induce a policyholder to replace Existing Policy with other life insurance
policy to the policyholder’s disadvantage."

(b) "Replacement": Unlike ‘twisting’, ‘replacement’ is a neutral term

defined in the Code in the following manner:

“Any transaction involving the purchase of life insurance is construed as

a replacement if within 12 months before or after a new life insurance
policy# (“New Policy”) is effected:

(a) an existing life insurance policy# (“Existing Policy”) or a substantial

part* of the sum insured of its basic life coverage:

(i) has lapsed/will lapse; or

(ii) was/will be surrendered; or

(iii) was/will be converted to reduced paid-up or extended-term

insurance under the non-forfeiture provision of the policy;

or

(b) a substantial part* of the guaranteed cash value of the Existing Policy
was reduced/will be reduced including where a policy loan was/will
be taken out against a substantial part* of the guaranteed cash value.

(# Life insurance policy includes all types of traditional life, annuity and
other non-traditional policies.)

(* “a substantial part” means “50% or above”.)”

Internal replacement, i.e. both the Existing and New Policies are issued
by the same insurer, is covered by the Code. The insurer concerned
should devise internal controls and measures to discharge its obligations
under the Code both as the selling office and the non-selling office.
However, converting a term life insurance to a whole life insurance (or
some forms of permanent life insurance) under policy provisions of the
Existing Policy is not construed as a “replacement”.

5/11
(c) Customer Protection Declaration (CPD) Form: This is a very
important document which an insurance intermediary must help an
applicant complete before the applicant agrees or makes a decision in
relation to the purchase of a New Policy. Prepared in conjunction with
the CPD Form, the “Explanatory Notes to Customer Protection
Declaration Form” explains in detail the duties of the insurance
intermediary regarding the completion of the CPD Form and how to
complete it (see Appendix A).

The Code requires LIMs to provide training to help their insurance

agents to get familiar with the contents of the CPD Form, of which the
most important features can be found below:

(i) the form is designed to discover any replacement being

recommended.

(ii) the insurance intermediary is required to explain and discuss with

the applicant the full implications of his replacement, if any, in the
following areas. Unless otherwise indicated, the insurance
intermediary has to give reasons and/or justifications wherever
required in the CPD Form in writing as fully as possible.

(1) Financial implications:

Estimated loss:
(a) It is stated on the CPD Form for reference only that
the policy set-up cost is usually two years’
premiums or 10% of single premium of the basic
life insurance policy replaced or to be replaced. No
reason is required if the estimated loss stated is
equal to or higher than this reference. The insurance
intermediary may use other reference for the
estimated loss provided he could reasonably justify
the estimation. In addition, if he states that the
policy replacement will result in no loss, or that the
estimated loss is less than two years’ premiums or
10% of single premium, he must give the reason and
justification in the space provided.

Annualised premiums:
(b) The insurance intermediary is required to write
down whether the new policy attracts higher
annualised premiums for the same sum insured and,
if a negative answer is given, the reasons for that.

Guaranteed cash values:

(c) Besides, the applicant should take note that the
projection of future values of the new life insurance
policy may be higher than the existing life insurance

5/12
 policy, but the projected values in most cases
depend on the insurers’ performance, which may not
be guaranteed. On the other hand, the insurance
intermediary is required to fill in the respective
guaranteed cash values of the existing life insurance
policy(ies) and the new life insurance policy on the
policy anniversary dates immediately after the
applicant reaches age 65. But where any of the
policies matures before this age, he should fill in the
guaranteed cash values on the policy anniversary
dates of each policy in the earliest maturity year.

(2) Insurability implications: the new insurer may review the

life insured's current state of health, occupation, life
style/habit and recreational activities. If any significant
change has occurred, the insurer may deny some coverage
or charge a higher premium. Such implications must be
explained to the client.

(3) Claims eligibility implications:

Suicide clause and contestability period:

(a) The new life insurance policy may have different
policy provisions and also may result in a new start
of the period in the suicide clause and of the
contestability period. This could result in a claim
being denied that would have been paid under the
existing life insurance policy. The insurance
intermediary has to help the applicant fill in the
respective expiry dates of the suicide exclusion
period(s) and contestability period(s) of the existing
life insurance policy(ies) and the new life insurance
policy. He also has to obtain the expiry date(s) of
the suicide exclusion period(s) and contestability
period(s) of the existing life insurance policy(ies)
from the applicant unless the applicant declares on
the CPD Form that he does not want to disclose
such information.

(b) The insurance intermediary has to explain to the

applicant that if he opts for reinstatement of his
existing policy following an incident of twisting
(see 5.2.5(e)(i)(4) below), it is the new insurer,
rather than the existing insurer, who will be
responsible for paying any claims, subject to the
terms and conditions of the new policy, that will
have occurred on a date when the existing policy
has been surrendered or lapsed in the course of the
policy replacement.

5/13
 (4) Other considerations:

The insurance intermediary is also required to help the

applicant:

(a) list those riders/supplementary benefits that are

granted under the existing life insurance policy(ies)
but not under the new life insurance policy. The
insurance intermediary has to obtain the
riders/supplementary benefits under the existing life
insurance policy(ies) from the applicant unless the
applicant declares on the CPD Form that he does not
want to disclose such information;

(b) list the reasons why the new life insurance policy is
more suitable for the applicant unless the applicant
declares on the CPD Form that that is not his
concern; and

(c) answer the question of whether the insurance

intermediary has advised the applicant of any
alternatives to replacing the existing life insurance
policy.
.
(iii) the original of the CPD Form shall be kept by the selling office,
with a copy for the client - a Hong Kong resident or otherwise -
attached to the policy, and another copy for the non-selling office
(i.e. the authorised long term insurer whose policy is being
replaced) within 7 business days of the issue date of the New
Policy.

Note: 1 The references above to insurance intermediaries in

relation to the CPD Form shall include insurance agents,
insurance brokers, their responsible officer/chief executive(s) and
technical representatives, as appropriate.

2 A specimen CPD Form and the explanatory notes to it can

be found in Appendix A for reference purposes.

(d) Identifying twisting: This may be initiated from a number of sources:

(i) Client initiated: if a client complains about suspected twisting,

(1) the complaint, received by the HKFI or other party, has to

be forwarded to the selling office;

(2) then the selling office has to investigate and follow the
same process as if it had itself discovered a suspected or
actual incident of twisting (see (ii) below). It also has to

5/14
 write to the client to acknowledge receipt of the complaint
and commit to notify the client, within 30 days of the
receipt, of its findings and any suggested arrangements.

(ii) Selling office initiated: if the selling office, in the course of

reviewing its internal controls and the CPD Forms – which it is
obligated to do under the Code – discovers cases of suspected
twisting or has evidence that existing policyholders may have
suffered because of twisting by its insurance agent(s) or the
insurance broker(s), it has to investigate them and take action (see
(e) below).

(iii) Non-selling office initiated: if an office has evidence that its

existing or ex-policyholders have suffered because of twisting by
insurance agent(s) of other office(s)/insurance broker(s), it has to
investigate and take action (see (e) below);

(e) Subsequent actions: Once twisting is identified as likely to have

occurred, the offices concerned should attempt to reach agreement. This
imposes an obligation on the offices to keep the client’s interest
foremost. The client has to be kept informed of any material facts or
arrangements which may affect his interest. Agreement must be reached
speedily within a period of 30 days after the identification of the twisting
and any follow up actions or arrangements affecting the interest of the
policyholder has to be completed within 45 days, i.e. the next 15 days.

(i) If it is agreed that twisting has occurred, the selling office must
immediately:

(1) report the insurance agent to the Insurance Agents

Registration Board (IARB), or the insurance broker to the
relevant broker body or the Insurance Authority as
appropriate;

(2) suspend the insurance agent from selling any further new
life insurance, or suspend accepting any further new life
insurance sold by the insurance broker’s chief
executive/technical representative who did the twisting;

(3) claw back the commission paid on the case(s) in question;

and

(4) write to the client, explaining that he may have been sold
policy(ies) unprofessionally, and giving him the option to
end the arrangements, request the return of all the
premiums paid on the New Policy, and reinstate the
Existing Policy(ies). The client will have 30 days to make
a decision. He also has to be told that the selling agent has
been suspended and has no further authority to represent
the selling office to sell new life insurance, or that the

5/15
 selling office has suspended accepting any further new life
insurance business sold by the insurance broker’s chief
executive/technical representative who did the twisting.

The non-selling office has to arrange terms for reinstatement of

the Existing Policy(ies), if the client so wishes, to allow the
client, to the maximum extent possible, to return to the same
position as if the twisting had not taken place. As stated in
5.2.5(c)(ii)(3)(b) above, where the client opts for reinstatement
of the Existing Policy, it is the selling office, rather than the non-
selling office, who will be responsible for paying any claims,
subject to the terms and conditions of the New Policy, that may
have occurred on a date when the existing policy had been
surrendered or lapsed in the course of the policy replacement.
.
(ii) If it cannot be agreed that twisting has taken place, the
complaining client or office may refer the complaint to the
IARB, the relevant broker body or the IA as appropriate, which
will give a ruling. Where twisting is established, it will decide
on the appropriate disciplinary action against the insurance agent
or insurance broker and inform the client of his rights to a
reinstated Existing Policy and to a return of all the premiums
paid on the New Policy.

(iii) In the event that the Life Insurance Council finds that an insurer
has failed to comply with the above process, it will:

(1) seek cooperation from the office(s) concerned;

(2) endeavour to mediate among all parties concerned; and /or

(3) refer the case to the IA where there is concrete evidence of

non-compliance.

5.2.6 Sales Illustrations for Linked and Non-Linked Policies

5.2.6a Linked Policy Illustration Document

The Securities and Futures Commission (SFC) requires that all

authorised investment-linked assurance schemes must issue to each of
their prospective participants an up-to-date Principal Brochure, which
should contain the information necessary for the participants to be able
to make an informed judgment of the investment proposed to them. In
addition, an ‘Illustration Document’ is required to be issued in
accordance with the guidelines set out in the SFC’s “Code on
Investment-Linked Assurance Schemes”. These we summarise below (a
format of the Illustration Document can be found in Appendix B):

5/16
(a) Minimum requirements for the information to be included in the
illustration document are:

(i) Surrender values and death benefits: the insurance

company must indicate what the policyholder would be
expected to receive if he redeems at the end of each of the
first 5 years of the contract, and for every fifth year
thereafter until maturity or the end of the policy whichever
is applicable, after deduction of all relevant charges. In a
similar manner, the insurance company should also
illustrate the projected death benefits in the event that the
life insured dies on those alternative dates without the
policy being redeemed.

The projected surrender values and death benefits should

be based on either 4 different assumed rates of return of
0%, 3%, 6% and 9% per annum respectively (Version 1
Template) or 3 different assumed rates of return of 0%, 3%
and 6% per annum respectively (Version 2 Template). For
both options, other than the 0% assumed rate of return, all
rates of return are maximum rates and insurers may choose
to illustrate lower rates. The illustration should include all
policy level charges but not fund management charges
levied by fund managers.

In addition, a statement worded as follows should be made

about the relationship between rate of return and policy
termination and about the consequence of an automatic
early termination:

[Under the assumed rate of return at 0% [and b%] p.a.,

your policy will remain in force up to an attained age of x
[and y] of the individual insured respectively. The policy
will terminate afterwards. Your policy may also terminate
under other adverse investment scenarios. If the actual
investment return is below the above assumed rate of
return, the policy may terminate earlier than above attained
age(s). You could lose all your premiums paid and
benefits accrued if any condition of automatic early
termination is triggered.]

(ii) Prescribed statements: the following statements should

appear in the Illustration Document:

‘THE ASSUMED RATES USED BELOW ARE FOR

ILLUSTRATIVE PURPOSES. THEY ARE NEITHER
GUARANTEED NOR BASED ON PAST
PERFORMANCE. THE ACTUAL RETURN MAY BE
DIFFERENT!

5/17
 IMPORTANT:

THIS IS A SUMMARY ILLUSTRATION OF THE

SURRENDER VALUES AND DEATH BENEFITS
(VERSION 1: SHOWN ON THE FOLLOWING PAGE)
OF (NAME OF PRODUCT). IT IS INTENDED TO
SHOW THE IMPACT OF FEES AND CHARGES ON
SURRENDER VALUES AND DEATH BENEFITS
BASED ON THE ASSUMPTIONS STATED BELOW
AND IN NO WAY AFFECTS THE TERMS OF
CONDITIONS STATED IN THE POLICY
DOCUMENT.’

The following statements should be clearly disclosed

before the scheme participant's signature:

"Warning: You should only invest in this product if you

intend to pay the premium for the whole of your chosen
premium payment term. Should you terminate this product
early or cease paying premiums early, you may suffer a
significant loss.

Declaration:

I confirm having read and understood the information

provided in this illustration and received the principal
brochure."

(b) Company customisation: subject to the approval of the SFC, the

insurance company may customise the document to include
additional information, provided that such additional information
is not misleading and does not otherwise detract from the
information disclosed in the minimum requirements.

(c) Illustration preparation: the insurance company has to prepare

an illustration document in conjunction with each proposed
investment by each prospective scheme participant, and provide
the document to the latter for his review and signature prior to
signing of the application form.
5.2.6b Standard Illustration for Universal Life (Non-Linked) Policies

The LIC has produced a Sales Illustration document for universal

life (non-linked) policies. The updated version of the document
“Standard Illustration for Universal Life (Non-Linked) Policies” was
produced in October 2015, and it should be adopted no later than 1 April
2016 for new products, and no later than 1 January 2017 for new and
existing policies of current products.

5/18
 The purpose of the Standard Illustration is to ensure that each
prospective policyholder is provided as a minimum with a summary
illustration of the benefits of a universal life (non-linked) insurance
policy. The following are the major provisions of the Standard
Illustration:

(a) Standard requirements: the standard information to be included

in the Illustration Document is set out in a sample format
obtainable from the HKFI or supplied by the insurance company.

Apart from figures, the Illustration Document includes the

following explanatory notes, information, advice and warning:

(i) the illustration given is only a summary illustration of the

major benefits of the proposed policy;

(ii) the illustration refers to the Basic Plan only (i.e. exclusive
of riders and additional benefits), and assumes that all
premiums are paid in full as planned without exercising
the premium holiday option;

(iii) the amount of total premium(s) may be slightly different

from the total of the premiums payable in the policy due to
rounding differences (the inclusion of this point is optional
for the insurer);

(iv) when reviewing the values shown in the illustration, the

applicant should take note that the cost of living in the
future is likely to be higher than it is today due to inflation;

(v) the applicant may browse a given website to understand the

insurance company’s crediting interest rate history for
reference purposes, bearing in mind that the interest rates
shown there are before any relevant policy charges (e.g.
cost of insurance and policy administration fees);

(vi) though the scales of charges used in the Basic Plan

illustration are set out in the Illustration Document, the
current scale, unless otherwise specified, is not guaranteed
and is subject to the insurance company’s sole discretion to
change with prior written notice to policyholders # months
before effective (note: the # may not be smaller than 1).
The charges to be disclosed should be separated into five
categories, i.e. premium charge, surrender charge, cost of
insurance, policy administration fee, and all other current
and maximum fees and charges;

(vii) the applicant should only apply for the product if he

intends to pay the premium for the whole of the premium
payment term;

5/19
 (viii) an early termination of the product or early cessation of
premium payments may cause him a significant loss;

(ix) the policy may terminate if the Account Value is

insufficient to pay the charges, or the policy loan balance
(if applicable) exceeds the Account Value.

(b) Company customisation: insurance companies may customise

the Illustration Document, except otherwise stated, to exclude the
information not applicable to the product and not relevant to
customers; and to include additional information provided that
such additional information is not misleading and does not
otherwise detract from the information disclosed in the standard
requirements. The additional information should be relevant to
illustrate the product details to customers. Company
customisation is also subject to such other limitations as
limitations on the use of insurance terminology, the presentation
of figures and the printing format, and requirements on the
applicant’s signature.

(c) Charges: where the charges adopted in producing the illustration

are different from those used currently by the insurance company,
this must be clearly stated and the charges could be higher than
that of the current level. The illustration should be free of any
misleading statement, promise or representation. The insurance
company’s Appointed Actuary is responsible for taking all
reasonable steps to ensure that the insurance company’s potential
policyholders are not misled as to their expectations.

(d) Rates of return: the insurance company should project the

values using two different assumptions. The first one is based on
the minimum guaranteed crediting interest rates prescribed under
the policy. If the policy does not offer any minimum guaranteed
crediting interest rate, a conservative crediting interest rate of 0%
per annum should be used. The second one is based on the
current assumed crediting interest rate (i.e. the current crediting
interest rate assumption based on best estimate) forecast by the
insurance company. The crediting interest rates are before policy
charges. In setting the best estimate assumptions in the Current
Assumed Basis, the insurance company’s Appointed Actuary
should have regard to the Actuarial Guidance Notes (AGN) on
Best Estimate Assumptions by the Actuarial Society of Hong
Kong (ASHK).

(e) Illustration preparation: an Illustration Document must be

prepared by the insurance company in conjunction with each
policy to be issued. This document has to be provided to the
prospective policyholder for review prior to signing the
application form in which case the prospective policyholder must

5/20
 sign a prescribed Declaration in respect of the illustration of
benefits and premiums which will be those stated in the policy.

(f) Language: the Illustration Document will be in the same

language(s) as used by the insurance company in its other pre-sale
literature. English or Chinese translation of the Document should
be available to customers upon request.

(g) Complaints or disputes: companies should maintain records in

respect of complaints or disputes arising from the issue of the
Illustration Document and to provide these records to the HKFI
and the IA upon request.

Note: the Standard Illustration can be found in Appendix C.

5.2.6c Standard Illustration for Participating Policies

The LIC has produced the “Standard Illustration for Participating

Policies” with the purpose of ensuring that every prospective
policyholder is provided as a minimum with a summary illustration of
the benefits of a participating insurance policy (excluding universal life
insurance). For the purposes of this Standard Illustration, a participating
(or with-profit) policy is one that pays the policyholder non-guaranteed
dividends or bonuses (including cash bonus and reversionary bonus).
The Standard Illustration should be adopted by LIC members
individually no later than 1 April 2016 for new products, and no later
than 1 January 2017 for new and existing policies of current products.

The following are the major provisions of the Standard

Illustration:
(a) Standard requirements: the standard information to be included
in the Illustration Document is set out in a sample format
obtainable from the HKFI or supplied by the insurance company.
Apart from figures, the Illustration Document includes the
following explanatory notes, information, advice and warning:
(i) the illustrations given are only summary illustrations of the
major benefits of the proposed Basic Plan only (i.e.
exclusive of any supplementary benefits), and assume that
all premiums are paid in full when due;
(ii) the amount of total premium(s) may be slightly different
from the total of the premiums payable in the policy due to
rounding differences (the inclusion of this point is optional
for the insurer);
(iii) the face value of reversionary bonus and terminal bonus
will be paid when the company is paying the Death
Benefit, whereas the cash value of these bonuses will be

5/21
 paid when the policy is surrendered in whole or in part or
terminated (other than due to the death of the life insured).
The cash value of these bonuses may not be equal to the
face value of the bonuses (this point is only applicable to
reversionary bonus plans);
(iv) the face value of reversionary bonus is guaranteed once
declared while the cash value of reversionary bonus is not
guaranteed / [The face value and cash value of
reversionary bonus are guaranteed once declared.] (this
point is only applicable to reversionary bonus plans);
(v) the projected non-guaranteed benefits included in Section 3
of the Standard Illustration (which is headed Basic Plan –
Illustration Summary) are based on the company’s
dividend/bonus scales determined under current assumed
investment return and are not guaranteed. The actual
amount payable may change anytime with the values being
higher or lower than those illustrated. As another example,
the possible potential impact of a change in the company’s
current assumed investment return on the Total Surrender
Value and the Total Death Benefit are illustrated in
Sections 4 (Basic Plan – Surrender Value - Illustration
Under Different Investment Return) and 5 (Basic Plan –
Death Benefit – Illustration Under Different Investment
Return). Under some circumstances, the non-guaranteed
benefits may be zero;

(vi) in Sections 4 and 5, benefits under Pessimistic Scenario are

based on a decrease of about x% per annum whereas
benefits under Optimistic Scenario are based on an
increase of about y% per annum in comparing with the
current assumed investment return rate;

(vii) as illustrated in Sections 3, 4 and 5, the customer can leave

the projected dividends and other cash payments with the
company for interest accumulation at an interest rate which
is not guaranteed. The current interest rate used to
illustrate the effect of accumulation in Section 3 is A% per
annum. The actual interest rate may change from time to
time with the rate being higher or lower than A%. In
accordance with the change in the investment return under
Pessimistic and Optimistic Scenarios in Sections 4 and 5 as
mentioned in (vi) above, the accumulation interest rates of
B% and C% are used respectively. These rates are also
not guaranteed. The customer may cash all or part of the
amount of projected dividends and other cash payments
without affecting the protection amount of Section 2 but
the total values shown above will be reduced accordingly;

5/22
 (viii) when reviewing the values shown in the illustrations in
Sections 3, 4 and 5, the customer should note that the cost
of living in the future is likely to be higher than it is today
due to inflation;

(ix) the applicant may browse a given website to understand the

company’s dividend / bonus history for reference purposes;

(x) the applicant should only apply for the product if he

intends to pay the premium for the whole of the premium
payment term; and

(xi) an early termination of the product or early cessation of

premium payments may cause him a significant loss;

(b) Company customisation: companies may customise the

Illustration Document, except otherwise stated, to exclude the
information not applicable to the product and not relevant to
customers; and to include additional information provided that
such additional information is not misleading and does not
otherwise detract from the information disclosed in the standard
requirements. The additional information should be relevant to
illustrate the product details to customers. Company
customisation is also subject to such other limitations as
limitations on the use of insurance terminology, the presentation
of figures and the printing format, and requirements on the
applicant’s signature.

(c) Assumption setting: In setting the best estimate assumptions for

the base scenario, the company’s Appointed Actuary should have
regard to the AGN on Best Estimate Assumptions by the ASHK.

(d) Pessimistic and optimistic scenarios: additional high and low

return scenarios should be provided in the benefit illustration to
show the variability of the ultimate results. A wide range of
scenarios is expected for investment strategy with higher
volatility. For the sake of consistency, the terms “Pessimistic
Scenario” and “Optimistic Scenario” should be used. The
underlying change in investment returns and accumulation
interest rate (if applicable) in these scenarios are required to be
disclosed in the Explanation Notes.

(e) Illustration preparation: an Illustration Document must be

prepared by the company in conjunction with each policy to be
issued. This document has to be provided to the prospective
policyholder for review prior to signing the application form in
which case the prospective policyholder must sign a prescribed
Declaration in respect of the illustration of benefits and premiums
which will be those stated in the policy.

5/23
 (f) Language: the Illustration Document will be in the same
language(s) as used by the company in its other pre-sale
literature. English or Chinese translation of the Document should
be available to customers upon request.

(g) Complaints or disputes: companies should maintain records in

respect of complaints or disputes arising from the issue of the
Illustration Document and to provide these records to the HKFI
and the IA upon request.

Note: a format of the sales illustration can be found in Appendix D.

5.2.7 Distributions of Policy Dividends

5.2.7a Basic Principles of Dividend Distributions

Participating policies, which are discussed in other parts of the

Study Notes (see 1.3.1b(a) and 4.10), are bought with expectations of
returns in the form of policy dividends, and they normally grant
guaranteed cash values as well. Generally, the amounts of dividend to be
declared and distributed are directly linked to the experience of the
pooled fund of the relevant participating policies. (By “pooled fund”, it
means the whole of the assets which the relevant insurer has created on
its balance sheet as a result of granting the participating policies and
which it then manages on behalf of such policies.) The experience of the
pooled fund over a given period is a function of the fund’s investment
yields, expenses, claims, etc. for that period. In general, dividend
amounts feel the largest impact from the pooled fund’s investment
returns, which may or may not be consistent with the overall business
performance of the insurer. As a matter of prudence, only when the
actual experience is found to be more favourable than the actuarial and
financial assumptions that the insurer has made should it declare policy
dividends.

As said above, dividend amounts depend on the experience of the

pooled fund. It is also worth noting that insurers normally reserve the
right to determine dividend amounts. In practice, decisions on dividend
amounts are based on the advice of the respective appointed actuaries
and subject to the approval of the respective boards of directors. The
actuaries, in making recommendations, will consider the experience of
the pooled funds, the economic outlook and the equity between different
classes and generations of policyholders within a single pooled fund.
Besides, dividends are normally smoothed out in order to reduce large
short-term fluctuations. Smoothing takes various forms and varies from
one insurer to another, depending on the terms of the insurance contracts
and the company policies.

5/24
 The Insurance Authority has issued a Guideline on Underwriting
Long Term Insurance Business (Other Than Class C Business) (GL16)
(see 5.2.8 and Appendix E) to impose requirements applicable to
participating policies on relevant insurers, the actuaries they have
appointed and their boards of directors. Below is an overview of such
requirements.

An insurer should have a corporate policy that covers allocation

of surplus/profits between shareholders and the participating pool, as
well as declaration of policyholder dividends/bonuses and other
discretionary benefits. This policy should be clearly documented,
approved by the board of directors and made available to the IA on
request.

When designing products with non-guaranteed benefits, the

appointed actuary is obligated to ensure that there is a fair chance of
achieving the non-guaranteed returns. The appointed actuary should
submit a report to the board of directors, recommending policy
dividends/bonuses and other non-guaranteed benefits annually or more
frequently, and the report should be made available to the IA upon
request. The dividends/bonuses declaration mechanism will be subject
to the IA’s regulatory review, who may require the insurer to appoint an
independent party to assess whether the corporate policy has been
applied completely, consistently and fairly.

It is the board of directors who are ultimately responsible for

interpreting the policyholders’ reasonable expectation and deciding on
dividends/bonuses declaration, taking into account the principle of fair
treatment of customers and the issue of equity between the shareholders
and the policyholders.

5.2.7b Methods of Dividend Distributions

In Hong Kong, policy dividends are generally distributed in three ways:

(a) As a cash dividend: many policyholders choose to leave cash

dividends on deposit with their insurers.

(b) As a reversionary bonus, where policy benefits are permanently

increased by the declared amounts (see 1.3.1b(a)).

(c) As a terminal bonus, such that the payout value is usually

targeted to be close to the asset share of the fund (the
policyholders’ notional share of the participating fund), taking
into account the total return of the underlying assets.

Cash dividends and reversionary bonuses are usually declared on

an annual basis while terminal bonuses are usually declared at policy

5/25
maturity or when the policy has been in force for a given number of
years.

In Hong Kong, the majority of life insurers use method (a), with a
few using method (b). Method (c) is an optional supplement to methods
(a) and (b). Whilst the above is a description of the typical dividend
philosophy, it is important to note that variations are possible. Member
companies of the HKFI publish information about their respective
dividend philosophies on their websites.

5.2.7c Advantages of Participating Policies

The main advantage of participating policies is that apart from

availability of cash values and death benefits guarantees, the
policyholder can participate in any favourable experience of the pooled
fund in the form of dividends. A second advantage is that the risk of
return to the policyholder is lower than with investment-linked policies,
owing to the said guarantees. With investment-linked policies, the
policyholder selects the underlying investments and will have the full
upside if they perform well but also the full downside if they perform
badly because such policies generally make no guarantees. The fact that
returns on participating policies are generally smoothed is another
advantage.

5.2.7d Transparency of Life Insurers with regard to Dividends

The practices commonly adopted by insurers in helping

policyholders better understand dividend distributions under
participating policies are as follows:

(a) Benefit Illustrations: At the point of sale (and later on at the

request of customers on policy anniversaries), insurers provide
them with an illustration of policy benefits, which separately
shows benefits that are guaranteed and those that are not.

The Actuarial Society of Hong Kong, with the encouragement

and support of the Insurance Authority, has issued a Guidance
Note on illustrations, “AGN5: Principles of Life Insurance Policy
Illustrations”, which aims to provide standards and principles in
preparing illustration documents.

Most insurers provide sales illustrations that assume that declared

cash dividends will be left on deposit with them to earn interest at
rates that are not guaranteed and that fluctuate with the market
interest level. Such assumptions are explicitly mentioned in the
illustrations. Furthermore, applicants are requested to sign
illustrations in order to ensure that they have read the illustrations
and that the illustrations have been explained to them.

5/26
 To assist potential policyholders in better understanding and
assessing the impact of changing rates of investment return,
insurers are required by GL16 to provide additional high and low
return scenarios in benefit illustrations. A wider range of
scenarios is expected where an investment strategy that will likely
lead to higher volatility of return is adopted.

(b) Annual Statements: In annual statements to customers, some

insurers highlight any changes to policy dividends and give broad
reasons for them. As a requirement of GL16, insurers should at
least on an annual basis provide policyholders with a refreshed
up-to-date inforce benefit illustration reflecting the latest
condition and outlook.

(c) Premium Offset: Insurance plan proposals sometimes project

that once premiums have been paid for a stated number of years,
assuming that all projected cash dividends are left on deposit with
the insurers, such dividends plus the projected interests on them
will be capable of funding all future premiums so that the
policyholders may then choose to stop paying premiums without
affecting the validity and continuity of the policies, which
practice is known as “premium offset”. While this option may
sound attractive to some customers, it is important to note that at
any time after such an option has ever been exercised by a
customer, it is possible to see unfavourable interest rate levels so
that he will have to pay premiums with cash in hand again or risk
policy lapse or reduced benefit amounts.

As a requirement of GL16, the customer should be provided with

a projection of the premium offset option based on different
scenarios, especially the adverse situation (where the premiums
are not offset due to a reduced dividend level). The illustration
may not use ‘vanish’, ‘vanishing premium’ or similar terms that
suggest that the policy has been fully paid up, to describe a plan
that allows using non-guaranteed elements to pay a portion of
future premiums. The customer should also be warned that the
sustainability of premium offset depends on future dividend
declarations, which are not guaranteed.

(d) General Information on Dividends: The document named

“Policyholder Dividends and Disclosure for Participating
Business” and issued by the LIC of the HKFI in 2009 provides
general background information on participating policies. Apart
from this, the HKFI requires its members to explain on their
websites their respective philosophies with regard to declaration
of policy dividends.

5/27
5.2.8 Guideline on Underwriting Long Term Insurance Business
(Other Than Class C Business) (GL16)

This Guideline (see Appendix E) is issued by the Insurance

Authority pursuant to the Insurance Ordinance taking into account the
Insurance Core Principles, Standards, Guidance and Assessment
Methodology promulgated by the International Association of Insurance
Supervisors. GL16 sets out requirements for authorized insurers
underwriting long term insurance business (other than Class C business).
Where appropriate, this Guideline should be read in conjunction with
other relevant codes/circulars/guidelines/guidance notes issued by the IA
or other regulatory bodies.

The major areas covered by GL16 are:

- Product design;

- Provision of adequate and clear information;

- Suitability assessment;

- Advice to customers;

- Appropriate remuneration structure;

- Ongoing monitoring; and

- Post-sale control.

According to GL16, an insurer who is selling participating (or

with-profit) policies or universal life policies should disclose on its
company website the non-guaranteed dividends/bonuses fulfilment ratios
(for participating (or with-profit) policies) or historical crediting interest
rates (for universal life policies) of each product series where new
policies belonging to that series have recently been issued. The
“fulfilment ratio” of a product is calculated as the average ratio of “non-
guaranteed dividends/bonuses actually declared” against “the illustrated
amounts at the points of sale”. Customers should be alerted to the fact
that dividend history is not an indicator of the future performance of the
participating products.

In this connection, the Insurance Authority has issued a guide to

prescribe a clear and uniform methodology to calculate and disclose
fulfillment ratios of the non-guaranteed dividends for participating
products, and historical crediting interest rates for universal life products.

5.2.9 Initiative on Financial Needs Analysis

Due to the long term nature of life insurance policies, their owners
may have their liquidity locked up. It is therefore important that

5/28
insurance advice provided by insurance intermediaries is based upon the
needs of the particular customers. In view of the necessity that follows
for insurance intermediaries to carry out financial needs analyses for
their customers, the LIC has produced an “Initiative on Financial Needs
Analysis” (see Appendix F) for compliance by its members, with effect
from 1 January 2016.

The requirements of the Initiative on Financial Needs Analysis are

as follows:

(a) Every application for a new life insurance policy (including a

rider and top-up) must be accompanied by a financial needs
analysis (FNA) form, if that is a policy of the nature specified in
Class C under the Insurance Ordinance, or in Class A under the
Insurance Ordinance except:

(i) term insurance policies;

(ii) refundable insurance policies providing hospital cash,

medical, critical illness, or personal accident cover;

(iii) yearly renewable insurance policies (without cash value) for

critical illness/medical cover; or

(iv) group policies.

(b) The FNA form must include all the questions and multiple choice
options in the suggested FNA form as set out by the HKFI.
Member Companies may modify the FNA form to include
additional questions and/or multiple choice options, if they
consider that such will further enhance the suitability assessment
for their own products. The Initiative on Financial Needs
Analysis allows Member Companies to accept FNA forms of
insurance brokers and insurance agencies provided that such forms
are in compliance with the requirements of the Initiative on
Financial Needs Analysis.

(c) Neither Member Companies nor customers can opt out of the
FNA. If a customer, for privacy or other reasons, chooses not to
disclose income/asset information under 4(a) or (b) (but not both)
of the FNA form, he must confirm his reason(s) in writing. This
notwithstanding, if the absence of information under the FNA
would render Member Companies or the insurance intermediaries
unable to comply with any of the requirements (e.g. assessing
affordability of products recommended or comparison of different
insurance options, etc.) under the Initiative on Financial Needs
Analysis or any other self-regulatory measures, Member
Companies must reject the relevant application and should advise
the customer accordingly.

5/29
(d) The FNA form must be clearly identified as a “Financial Needs
Analysis” and be signed and dated by the customer.

(e) The FNA form should include the following:

- personal particulars (name, date of birth, marital status,

occupation, education level, etc.);

- financial outgoings (monthly living expenses,

rent/mortgage redemption, etc.);

- disposable assets (savings, stock/securities/bonds, etc.);

- liabilities (mortgage loan, debts, etc.); and

- family commitments (number of dependants, education

funds, etc.).

(f) Insurance intermediaries should take into account the customers’

total protection needs, total disposable assets, financial outgoings
and liabilities, as well as his/her willingness and ability to pay
premium (and the duration of payment) in assessing the
affordability of the customers before making recommendation.
The factors considered, evaluation, and reason(s) for the
recommendation made by the selling intermediary should also be
included in the FNA.

(g) Member Companies must require the insurance intermediaries to

carry out an FNA (including comparison of different insurance
options) with the customers before recommending to them any
life insurance products and signing the application.

A signed FNA form shall have a validity period of one year, i.e. in
the event that a customer purchases additional insurance coverage from
the same Member Company within a year after an FNA form is signed,
he/she will not necessarily have to go through another FNA provided that
there are no substantial changes in the customer’s circumstances (and in
such a case Member Companies can rely on the declaration by the
customer) and that there is no mismatach (i.e. needs, risks, affordability
etc.) identified.

5.2.10 Important Facts Statement for Mainland Policyholder

The Insurance Authority (IA) has issued the Important Facts

Statement for Mainland Policyholder (“IFS-MP”) (see Appendix G)
for compliance by authorized insurers carrying on long term business
starting from 1 September 2016. The IFS-MP aims to remind
Mainland customers of the factors and risks to be considered when
they are taking out long term insurance policies in Hong Kong to
enable them to make an informed decision. The requirements in
respect of the IFS-MP are as follows:

5/30
(a) The IFS-MP is required for all new applications through any
distribution channels for long term insurance individual policies
under Class A, B, C, D, E, and F of “long term business”
as defined in the Insurance Ordinance made by customers being
holders of Resident Identity Card (PRC). They shall not opt-out
of this requirement. For the avoidance of doubt, in case of
change of policy ownership or policy assignment where the new
policyholders/assignees are holders of Resident Identity Card
(PRC), the IFS-MP is required for the new
policyholders/assignees.

(b) The IFS-MP needs only be conducted once for one policy.
There is no need for Mainland customers to sign the IFS-MP for
top-up or rider addition if the basic plan was taken out after the
implementation of the IFS-MP. On the other hand, if the
basic plan was taken out before the implementation of the IFS-
MP, the insurer concerned should endeavour to ask the Mainland
customers to sign the IFS-MP for top-up or rider addition. In case
it is not possible to do so (e.g. the insurer concerned is unable to
contact the customer or the customer refuses to sign the IFS-MP),
the insurer may send the IFS-MP to the Mainland customer for
information together with the other document(s) to be issued
for the top-up or rider addition. The insurer must retain
record of dispatch as proof of compliance with the requirement.
For the avoidance of doubt, if an existing Mainland customer
subsequently purchases a second life insurance policy, he/she
has to sign another IFS-MP. That said, if the Mainland customer
takes out more than one policy from an insurer at the same time,
the insurer has the option to require the customer to sign on one
single IFS-MP with all those product names listed at the top of the
IFS-MP; or individual IFS-MP for each product taken out.

(c) It should be presented as a separate form. In case the insurer

intends to include it as a separate section within another point-of-
sale document (e.g. application form), prior consultation with the
IA is required.

(d) Intermediaries are required to go through the IFS-MP on a point-

by-point basis with the Mainland customers at the point-of-sale.

(e) Insurers must adopt the IFS-MP in full, although individual

insurers may add additional disclosure to accurately reflect the
risks associated with their specific products. All the questions
must be presented in a single form/section with the heading
clearly stated as IFS-MP.

(f) The IFS-MP follows the practice of the IFS for Investment-linked
Assurance Scheme (“ILAS”) where the customer will need to sign
on every page of the form.

5/31
 (g) Insurers may also prepare English and Traditional Chinese
versions of the IFS-MP. However, the one signed by the
Mainland customers must be in Simplified Chinese.

(h) A copy of the signed IFS-MP must be provided to the Mainland

policyholders. Insurers have the discretion as to when the copy is
delivered but in no case should it be delivered later than policy
delivery (i.e. it may be delivered together with the policy). For
the avoidance of doubt, this does not affect the requirement for
the return of policy applications from Mainland customers to
insurers within 7 working days of the signing of policy
application (including the declaration signed by the
policyholder confirming that the selling process is conducted
in Hong Kong) where the insurers concerned do not have an
independent process for authenticating the identification and entry
proofs documents of the Mainlander customers.

(i) There will be no impact on the existing post-sale confirmation

call arrangement for ILAS and vulnerable customers.

(j) For ILAS products, Mainland customers have to sign both IFS-
MP and IFS-ILAS.

(k) The font size of the IFS-MP must not be smaller than 12.

(l) The IFS-MP is a document required by the IA. For the

avoidance of doubt, it is not a marketing document (i.e. for
ILAS) and does not require the approval of the Securities and
Futures Commission.

5.2.11 Relevant Guidelines by Approved Bodies of Insurance Brokers

(a) Hong Kong Confederation of Insurance Brokers (CIB)

The CIB has issued a number of Guidance Notes to clarify its
intention in implementing its self-regulatory regime of
insurance brokers. With regard to insurance broking businesses
that involve long term policies, the CIB has prescribed a
‘Guidance Note on Conducting “Know Your Client”
Procedures for Long Term Insurance Business’ (CIB-GN(4))
(see Appendix H) for compliance by CIB Members and their
registrants. The major contents of CIB-GN(4) include the
following:

1. Record-keeping and Verification

- CIB Members should, without relying upon insurers,

keep such documentary records as are sufficient to
demonstrate satisfactory compliance with the
procedures of client identification and needs analysis.

5/32
 - CIB Members should develop and use their own
forms to conduct the said procedures.
2. Identification

- Examples of personal particulars of clients that should

be recorded and verified are given in CIB-GN(4).

- Where a client is seeking insurance in the capacity of

a trustee, the procedures of client identification and
needs analysis should be conducted on the prospective
beneficial owner of the policy.

- The IA’s Guideline on Anti-Money Laundering

and Counter-Terrorist Financing (GL3) should be
followed in obtaining and verifying the particulars of
corporate clients.

3. Needs Analysis

- In assessing clients’ needs, CIB Members should have

understanding of such circumstances of the clients as
include: their existing and potential financial
commitments, their income streams, and their various
financial needs and priorities.

- CIB Members should ensure that the financial

information of the client to be collected would enable
them to assess and to advise the client on his
capability to commit to any new or additional long
term insurance policy.

- CIB Members should specifically ask for details of

the client’s long term insurance policies that are in-
force, paid-up, suspended or under premium holiday.

- Where a CIB M ember is allowed by an insurer to use

its own Financial Needs Analysis form instead of that
of the insurer, it should comply with the requirements
as set out in the latest version of the Initiative on
Financial Needs Analysis (see 5.2.9) of the HKFI.

The CIB has also introduced a “Guidance Note on Product

Recommendation for Long Term Insurance Business” (CIB-
GN(12)) (see Appendix I) to provide its members with
guidelines on long term insurance product recommendations,
which should be read in conjunction with CIB-GN(4). Its main
contents are as follows:

5/33
1. Assessment
- Prior to recommending any Long Term Insurance
policies, CIB Members should properly assessed the
information of the clients collected from conducting
the “Know Your Client” procedures.

- Clients’ needs should be assessed by referring to such

relevant information as has been disclosed in
conducting the “Know Your Client” procedures.

- If a client is covered by an existing long term

insurance policy that is in force, paid-up, suspended,
under premium holiday, or under an arrangement of
reduced contribution, CIB Members should give him
advice on an appropriate option under such a policy
that will satisfy the identified insurance needs, prior to
making advice on a new or additional long term
insurance policy.

- In conducting the assessment, CIB Members should

verify all available information and satisfy themselves
that the client is financially capable of committing
extra funds to the options to be formulated.

- The assessment should be repeated when CIB

Members become aware of changes in the client’s
circumstances.

2. Product Selection

- CIB Members should put in place procedures for

selecting from the market options that will satisfy
clients’ needs and financial circumstances.

- CIB Members should be both provider-neutral and

product-neutral when selecting products. When more
than one type of product, or a hybrid of different types,
are available to meet a client’s specific needs and
financial circumstances, CIB Members should not
confine the options to a single type of product or to
the products of a single provider.

- CIB Members are reminded that in accordance with

CIB Membership Regulation 14.5, it is only when
there are no suitable products offered by authorised
insurers in Hong Kong or it is explicitly required by
clients, that CIB Members may arrange insurance
products of providers not authorised in Hong Kong.

5/34
3. Recommendation in Writing

- CIB Members should present in writing their

recommendations and the bases thereof to the client,
who should be asked to confirm his decisions in
writing. A copy of the confirmation should be
provided to the client for retention. The bases should
include the factors considered, evaluation, and reasons
for recommendation.

- In the recommendation of a regular premium policy,

CIB Members should include: the ratio of the regular
premiums to the client’s disposable income (to be
calculated in accordance with the Guidance Note), the
financial commitment of the client (including the
premiums for any riders) and whether the premium
payment term goes beyond the client’s target
retirement age (and in this case the client’s intended
source of fund).

- Before proceeding to arrange a regular premium

policy, CIB Members should obtain a declaration by
the client that he is comfortable with the said ratio,
consents to the financial commitment, and where
applicable, confirms his ability to pay premiums
beyond his target retirement age.

- In the recommendation of a single premium policy,

CIB Members should include the premium/liquid
asset ratio, the lock-up period (i.e. the period when
any charge or fee will be applicable to total or partial
withdrawal or surrender of policy), and, if any
premium financing, leverage or gearing is involved,
the interest rate risk and the downside implications of
interest rate increases.

- Before proceeding to arrange a single premium policy,

CIB Members should obtain a declaration by the
client that he is comfortable with the ratio, the lock-up
period and if applicable the downside implications.

- Where an insurance product of a provider not

authorised in Hong Kong is included in the
recommendation, CIB Members should explain the
reasons for that.

- No policy illustration other than the policy illustration

documents prepared and provided by insurers is
allowed.

5/35
 (b) Professional Insurance Brokers Association (PIBA)

PIBA has issued a set of Membership Regulations, covering

Code of Conduct and some other topics. The Membership
Regulations are applicable to both general and long term
insurance businesses.

5.3 UNDERWRITING

Underwriting may be simply described as the assessment of risks for the

purposes of insuring them or deciding what insurance terms should apply. Another
way of describing the term is to say that it is determining the insurability of proposed
risks. Since life insurance involves a long-term contract that cannot be cancelled by
the insurer, we may say that normally life insurance underwriting for an individual risk
can only be done once. It is therefore important to get it right first time.

5.3.1 Underwriting Factors

Underwriting is said to consist of two main stages:

(a) Identifying the degree of risk: from experience life insurance

underwriters can identify degrees of risk with applications, usually under
two headings:

(i) Physical hazard: this concerns largely objective factors that are
likely to increase the risk of the insured event (death) happening.
These will include obvious features such as known health
dangers, including:

(1) significantly overweight;

(2) heavy smoker;

(3) substance abuse (alcohol, drugs etc.);

(4) very dangerous occupation or leisure pursuits;

(5) adverse inheritable family or personal medical history.

(ii) Moral hazard: this concerns rather more subjective factors

surrounding the basic honesty or honourable intentions of the
applicant/proposer. Whilst suicide is not a common potential
problem (and is in any event covered to a large extent by policy
provisions - see 4.12), there are other considerations. For
example, the person may deliberately hide important information
or submit false information to obtain cover. It is, of course, less
easy to determine moral hazard than physical hazard.

5/36
(b) Classifying the proposed risk: classifying proposed risks into
appropriate categories enables the insurer to determine an equitable
premium. Insurers tend to have four categories of risks, as follows:

(i) Standard risks: these present no abnormal features, and are

perfectly acceptable at the appropriate premium according to the
age and sex of the applicant.

(ii) Sub-standard risks: sometimes called special class risks, they

are expected to produce a higher mortality rate than a group of
normal lives. They are insurable, but only subject to certain
considerations to be discussed in 5.3.3 below.

(iii) Declined risks: as the name indicates, these are risks that a
particular insurer has found to be unacceptable. Insurers
generally try to give cover if they reasonably can, but obviously
there are some applications where health or other factors make it
impossible to accept.

(iv) Preferred risks: not all insurers use this category, which implies
an above average risk application that merits a discount or other
favourable terms. This may include confirmed non-smokers or
individuals who otherwise represent better prospects of long years
before a claim is likely to arise.

Note: The above may be said to represent technical underwriting, involving

an assessment of the intrinsic and perceived hazards presented by individual
risks. We should also note what is called Financial Underwriting. This term
relates to an assessment of the sum to be insured in relation to various matters,
including:

1 the perceived ability of the policyowner to meet premium

obligations;

2 the degree of risk presented (and therefore whether reinsurance

might be advisable/available);

3 accumulation of policy plans for the same person;

4 whether it is in excess of usual levels for persons corresponding to

the age and general circumstances of the applicant/proposer. We
cannot say that any life insurance is too much, but if it is very high
by customary standards this may put the insurer on enquiry.

5/37
5.3.2 Medical Reports

5.3.2a Non-medically Examined Business

Many life insurance plans are arranged on a non-medically

examined basis. That is, the information supplied on the application and
other circumstances surrounding the proposal (age, apparent health, sum
to be insured, etc.) allow the underwriter to proceed without further
enquiry.

5.3.2b Medically Examined Business

Sometimes, however, further information is required from

qualified medical practitioners. The source of such enquiry may be an
attending physician (by which is meant a doctor or other qualified
medical person who usually supplies or has previously supplied medical
care to the applicant) or an examining physician (by which is meant a
physician who conducts a medical examination (the U.S. term commonly
used is a physical) at the request of the insurer, who pays for this). A
number of factors need to be considered with this subject:

(a) A sensitive subject: it is human nature to become anxious at the

thought of a medical examination. This is quite illogical, as it
must be for one's good to know the truth, but that is not how most
of us think. Insurers are quite aware of this and only request
medical information if it is deemed really necessary. In addition,
great care has to be taken not to infringe any statutory provisions
regarding the protection of personal data.

(b) Attending Physician's Statement (APS): this is the most

frequently required medical report and the usual reasons for
requesting it are:

(i) specific medical disclosures on the application need further

enquiry;

(ii) the amount of insurance requested is high;

(iii) the applicant is at a fairly advanced age (say, over 50).

(c) Specialised medical questionnaire: the examining (or attending)
physician may be supplied with a separate questionnaire
specifically designed to obtain information on a particular illness
or condition that needs to be considered with the applicant
concerned. This may relate to any of a number of conditions,
ranging from blood pressure to cancer, being conditions that
previously disclosed information suggests a need for further
enquiry.

5/38
 (d) Confidentiality: obviously, medical information is very private
and the information obtained must be treated with the utmost
confidence. However, if and when medical tests are suggested,
the applicant has the right to know what tests are to be done, what
the information is needed for, and (if he wants to know) the
results of any tests.

5.3.3 Sub-Standard Life and Underwriting Measures

Usually for medical, but sometimes for other reasons, a particular

applicant may prove to be below the required standard for acceptance at normal
rates. There are a number of possible underwriting reactions to this situation,
including:

(a) Refuse to insure: sometimes called declinature. This is a drastic

measure that insurers prefer to avoid if at all possible. Most life
applications can be accommodated, although sometimes the terms of the
insurance may have to be more severe.

(b) Load the premium: increasing the premium is a standard way of

dealing with sub-standard risks. The extra premium, which may be quite
modest or quite substantial according to circumstances, can turnthe
abnormal into insurable risks. A common form of such a method is a
method of Extra Percentage Tables, which is to classify sub-standard
risks into groups based on the expected percentages of standard
mortality and then to impose extra premiums on individual risks that
reflect the excess mortality (see (c) below) of these risks.

(c) Other options: the above two reactions are the most common, but there
is a wide range of possibilities, which might include one or more of the
following:

(i) to create a "debt" on the policy (or a lien against the policy),
which normally will reduce year by year so that it disappears on a
specified date. This method is suitable where the excess or extra
mortality is of a distinctly decreasing and temporary nature.

A ‘debt on policy’ is one of the underwriting measures which are

associated with the ‘numerical system of rating’. Under this
system, the underwriter applies a mortality rating of 100 to the
normal average healthy life, and then adds to it for adverse
features (e.g. overweight) and subtracts from it favourable
features (e.g. non-smoking). The excess of the final mortality
rating over 100 is termed an ‘extra mortality’. This extra
mortality will be converted into an additional premium or a debt
against the sum assured.

The decreasing debt is the most commonly used type of debt.

Suppose the debt is set at $190,000 at the inception of a 20-year

5/39
 endowment policy for a sum assured of $400,000. Should death
occur in the first year of cover, the policy proceeds will be
$210,000 (i.e. $400,000 minus $190,000). The debt will reduce,
and so the actual cover will increase, at the end of each of the
first 19 years of cover, by $10,000. So in the last year of the
policy, the cover is $400,000.

Note: allocation of bonuses will be done on the basis of the full

sum assured (i.e. the nominal cover).

(ii) specific exclusions, perhaps of death from a particularly

dangerous pastime or leisure pursuit (this would be very rare,
since it tends to defeat the object of the cover);

(iii) offering a limited plan: short term cover may be possible, where
the medical evidence indicates that very long-term insurance is
doubtful;

(iv) decline to accept at present, i.e. to defer a decision, if the

applicant is severely injured or otherwise has a (hopefully)
temporary adverse condition.

5.4 POLICY ISSUANCE

Once the underwriting process is complete and cover has been approved, the
policy can be prepared and then delivered to the policyowner. The important fact that
a policy cannot be cancelled or amended after its issue without the agreement of the
policyowner once more needs to be mentioned. Issuing and delivering the policy in
some respects may be looked upon as the "point of no return" for the insurer. Careful
policy checking and confirmation is therefore needed before this happens.

5.4.1 Policy Delivery

This may be considered with policy issuance as the two are very closely
connected. Using modern technology, policy documents can be produced with
great speed and accuracy. The in-house system should create the client's record
and verify that the first premium has been received. Policies are mostly in
standard format within the class and plan concerned. Therefore, only variations
affecting the particular client alter the routine format. All of this can be dealt
with by an automated system. Some slight differences in procedure should be
noted as follows:

(a) Individual policy covers (including annuities): the production and

delivery is straightforward, delivery normally usually being made by the
marketer.

(b) Group policy covers: here the process involves enrolling individual
employees (or other group persons). The technology system must
therefore produce not only the master policy, but also a certificate and

5/40
 perhaps an enrolment card for each insured person. Each such person
receives a certificate and completes an enrolment card, the process
normally being overseen by the insurance intermediary or group
representative.

5.5 AFTER SALES SERVICE

The conservation of existing business has been mentioned before (see

5.2.3a(a)). This, for reasons given, is very important and the quality of after-sales
service is a vital element in this area. Such service is within the responsibilities of
Client Service personnel (see 5.1.1(e)), whose department might well now be called
Policyowner Service, or POS. By way of reminder, the duties of POS may include:

(a) Correspondence: and other communication with customers.

(b) Documentation: duplicate policies, surrenders, plan conversion, etc.

(c) Premium payments: handling all aspects of this.

(d) Benefit administration: cash values, policy loans and dividends.

(e) Policy changes: see below.

5.5.1 Policy Changes

These changes may be relatively trivial, amending some administrative

detail, or may have a significant effect upon contract terms. The changes
usually requested include changing the

(a) type of insurance cover: obviously of considerable significance;

(b) address: of the policyowner or beneficiary, for example;

(c) beneficiary: clearly this must be a permissible change, under contract

terms;
(d) amount of cover: after any due underwriting consideration;

(e) owner of the policy: another obviously important change.

Note: All changes must be carefully processed. The change requested may
seem very straightforward, but there is always the possibility that it will have
legal or other implications, ranging from underwriting or reinsurance matters
even to potential attempted fraud (money laundering, etc.).

5/41
5.6 CLAIMS
With Non-Life insurance, claims are only expected under a small proportion of
policies. There the cover is "in case" there is need and generally speaking neither
party wishes to experience a claim situation. The latter may be true in some respects
for Life insurance, but there a claim (except for term insurance) is inevitable if the
policy is kept in force. Indeed, with many contracts having a savings element, the
policyowner often looks forward to making a claim. Claims may be considered under
three headings, as follows:

5.6.1 Maturity Claims

Mostly concerning endowment insurance, these involve situations

where the life insured is still living and (if also beneficiary) able to collect the
proceeds personally. With these, as with all procedures dealt with under this
Chapter, each insurer may have its own system, but typically the following
considerations arise with maturity claims:

(a) Near the date: a month or so in advance of the date the insurer writes to
the policyowner, in order to:

(i) remind him of the maturity date;

(ii) state the amount payable;

(iii) list any requirements for payment;

(iv) enclose a relevant form of release.

(b) Claim entitlement: the insurer can only deal with the person having a
right to the policy proceeds, who could be the policyowner himself, an
assignee (where the policy has been assigned), or a trustee (where the
policy has been placed in trust). Also, the policy will be required and, in
practice, only assignments duly recorded are recognised. Regarding loss
of a life policy, this is only inconvenient but not crucial, because the
policy is only evidence of the insurance contract, rather than the contract
itself. However, as failure to produce a policy may constitute
constructive notice to the insurer (i.e. knowledge that the insurer would
have acquired had it made the investigations that are usual in the
circumstances) of another person’s interest in it, a prudent insurer will
require that a proper search for it be made. If it is still unfound, the
insurer may ask the claimant to make a statutory declaration in respect of
the loss, and to provide a written promise to indemnify the insurer
against any losses due to its settling the claim without production of the
policy.

(c) Adjustments: the payment may have to be subject to deductions for any
outstanding items, such as policy loans, unpaid premiums and interests
owing. Of course, any third party interest has to be respected and
processed in an appropriate manner.

5/42
(d) Proof of age: if the policy is marked "age not admitted", this means that
formal proof of age was not given at policy inception. Some insurers
may not require confirmation of age if the policy has matured, but it
should be requested because misstatements of age could have an impact
on the policy benefit (see 4.8).

(e) Unpaid maturities: a suitable monitoring and follow-up procedure must

be in existence for any maturity claims where the policyowner does not
respond to (a) above.

5.6.2 Death Claims

Maturity claims, for obvious reasons, are normally processed in a

"happy" atmosphere. Death claims on the other hand inevitably have a serious
and sometimes tragic background. Whilst this must not intrude unduly into the
professional way in which the claim is processed, insurers and insurance
intermediaries should be sensitive to the situation. The specific points needing
attention with such claims are:

(a) Claim entitlement: people who are possibly entitled to a policy’s death
benefits include the surviving policyowner in the case of a third party
policy (see Glossary), the personal representative of the policyowner-
insured, an assignee and a trustee. Where a policy is expressed to be
payable to a third party, named or unnamed, without creating a trust or
effecting an assignment, he will normally have no right to sue under the
contract and it is the policyowner’s successors in title who can enforce
the contract. That said, where paying the third party has been made an
essential term of the contract, payment to him will discharge the insurer
of policy liability so that whether or not the paid third party may, in
certain circumstances, have to account to the policyowner’s personal
representative will not concern him.

For “loss of policy” procedure, please see 5.6.1(b) above.

(b) Date of death: this must be established, as it can affect the amount
payable, e.g. with decreasing term insurance, and with any
dividend/bonus calculations. Indeed, with term insurance, the policy
could have expired.

(c) Proof of death: normally, this is fairly easy to obtain, with the death
certificate (the original document must be produced). Problems may
arise over death certificates, however, where death arises or is alleged to
have arisen overseas. This has on occasions been a particular area for
fraud.

(d) Cause of death: this will be shown on the death certificate and it may be
important for a number of reasons, including:

(i) suicide: happening within the suicide exclusion period (see 4.12);

5/43
 (ii) accident: the policy may be subject to an ADB rider (see
3.2.1(a));

(iii) suspicious or surprising: death shortly after the policy was issued,
or where the cause would normally develop over a longer period
than that for which the policy has been in existence, will put the
insurer on enquiry. Fraud must always be a possibility in such
circumstances. Even if fraud does not apply, the policy may still
be within a contestable period (see 4.2);

(iv) murder: in most cases, this will not affect the validity of the
claim, but if the murderer is proved to have been the beneficiary,
the law ("public policy") will not allow the murderer to benefit
personally.

(e) Presumption of death: where no death certificate can be issued and it is

assumed the life insured has died, this may have to be resolved by the
court.

(f) Proof of age: see comments in 5.6.1(d). Normally, proof of age is easily
obtained by producing the deceased's birth certificate, identity card or
passport.

5.6.3 Surrenders

Many of the considerations arising with maturity claims have relevance

here, as the claimant is still living. Specifically, areas needing attention are:

(a) Proof of title: those who are possibly entitled to the cash value include
the policyowner, an assignee and a trustee (or a trustee-in-bankruptcy).
For “loss of policy” procedure, please see 5.6.1(b) above.

(b) Adjustments: unpaid premiums, policy charges, policy loans and

interests must be taken into account;

(c) Discharge: an appropriate release is obtained. Care must be taken to

protect any assignee or third party interest in an appropriate manner;

(d) Other enquiries: the insurer or insurance intermediary should take

special care with applications for surrender of the policy. Obviously, the
policyowner has every right to discontinue cover, but it may be helpful
and productive to make discreet and courteous enquiries so as to detect
potential attempted fraud, e.g. money laundering.

Sometimes, the insurance meets a real need for the client, but he meets
unexpected life situations and his first thought is to cancel his insurance. That
may not be in his best interests and other more suitable alternatives may be
available (policy loan, use of nonforfeiture provisions, etc.).

-o-o-o-

5/44
 Representative Examination Questions

Type "A" Questions

1 A mutual life insurance company means that:

(a) each shareholder has limited liability; .....

(b) the company is owned by shareholders; .....
(c) all policyholders share equally in profits and dividends; .....
(d) the company is legally owned by its participating policyholders. .....

[Answer may be found in 5.1]

2 Which of the following is not likely to be the responsibility of the marketing

department of a life insurance company?

(a) market research; .....

(b) product research; .....
(c) settlement of claims; .....
(d) promotions and publicity work. .....

[Answer may be found in 5.1.1(f)]

Type "B" Questions

3 Which two of the following statements concerning the "Cooling-off Initiative"

are true?

(i) The period is for 14 days only.

(ii) It concerns all life insurance members of the Hong Kong Federation of
Insurers.
(iii) If properly exercised, the new policy is cancelled and the premiums are
returned.
(iv) The period relates to the time during which the insurer may cancel the
policy.

(a) (i) and (ii); .....

(b) (i) and (iii); .....
(c) (ii) and (iii); .....
(d) (iii) and (iv). .....

[Answer may be found in 5.2.4]

5/45
4 Which three of the following are matters likely to affect physical hazard when
underwriting a life insurance application?

(i) Significantly overweight

(ii) Adverse inheritable family medical history
(iii) Dishonesty of the applicant in providing information
(iv) The applicant's heavy dependency on drugs, alcohol or tobacco

(a) (i), (ii) and (iii); .....

(b) (i), (ii) and (iv); .....
(c) (i), (iii) and (iv); .....
(d) (ii), (iii) and (iv). .....

[Answers may be found in 5.3.1]

[If still required, the answers may be found at the end of the Study Notes.]

5/46
 Appendix A
Customer Protection Declaration Form
(Source: HKFI)

6/1
6/2
6/3
6/4
6/5
6/6
 Appendix B
Information to be disclosed in the Illustration Document for
Investment-Linked Policies
Illustration Document for Investment-linked Policies (Version 1)
(Source: SFC)

6/7
6/8
Illustration Document for Investment-linked Policies (Version 2)
(Source: SFC)

6/9
 Appendix C
Standard Illustration for Universal Life (Non-Linked) Policies
(Source: HKFI)

6/10
6/11
6/12
6/13
6/14
6/15
 Appendix D
Standard Illustration for Participating Policies
(Source: HKFI)

6/16
6/17
6/18
6/19
6/20
 Appendix E
Guideline on Underwriting Long Term Insurance Business (Other
Than Class C Business) (GL16)
(Source: IA)

6/21
6/22
6/23
6/24
6/25
6/26
6/27
6/28
6/29
6/30
6/31
6/32
6/33
6/34
6/35
6/36
6/37
6/38
6/39
6/40
6/41
6/42
6/43
6/44
6/45
6/46
 Appendix F
Initiative on Financial Needs Analysis
(Source: HKFI)

6/47
6/48
6/49
6/50
6/51
 Appendix G
Important Facts Statement for Mainland Policyholder
(Only Chinese version available)
(Source: IA)

6/52
6/53
6/54
6/55
 Appendix H
Guidance Note on Conducting “Know Your Client” Procedures for
Long Term Insurance Business (CIB-GN(4))
(Source: CIB)

6/56
6/57
6/58
 Appendix I
Guidance Note on Product Recommendation for Long Term
Insurance Business (CIB-GN(12))
(Source: CIB)

6/59
6/60
6/61
 GLOSSARY
Absolute Assignment (絕對轉讓) In life insurance terminology, an 4.9(f)(i)
Absolute Assignment is an irrevocable assignment of all policy ownership
rights to a third party to the contract.

Accelerated Death Benefits (提前支付死亡保險利益) These are life 3.3

insurance death benefits which may, in prescribed circumstances (e.g. life
threatening health situations), be payable in part or in full in advance of death
of the policyowner-insured.

Accident Benefits (意外保險利益) Additional benefits that may be 3.2

added to a life policy by means of an Accidental Death Benefit (ADB) Rider
（ 意 外 死 亡 保 險 利 益 附 約 ） or Accidental Death and Dismemberment
(AD&D) Rider（意外死亡及喪失肢體附約）.

Accidental Death and Dismemberment (AD&D) Rider (意外死亡及喪失肢 3.2

體附約) Under this rider, an accidental death benefit is payable in a sum
equal to the face amount of the basic plan, providing what is termed a "double
indemnity"(雙倍賠償), and a dismemberment benefit is payable in the event
of, say, loss of any two limbs or loss of sight in both eyes.

Accidental Death Benefit (ADB) Rider (意外死亡保險利益附約) An 3.2.1(a)

addition to a basic life plan, providing a double benefit should the life insured
die from an accident.

Actively-at-Work Provision (在職工作條款) A group life insurance policy 2.4(f)

provision that to be admitted to the plan, a prospective member (employee)
must have been present at work on the day when coverage became effective.

Activities of Daily Living (ADLs) (日常起居活動) A list of basic human 3.3.2(c)

needs and functions (washing and dressing oneself, etc.); inability to perform
these will satisfy a criterion for payments under a Long Term Care Benefit
rider（長期護理附約）.

Annually Renewable Term (ART) Insurance (每年可續保定期保險) 2.1.1b(a)

An alternative title for Yearly Renewable Term (YRT) Insurance.

Annuitant (年金標的人) The annuitant of an annuity is the person whose 2.3(a)

life is the subject matter of that annuity.

Annuity (年金) A contract whereby an insurer promises to make a series 2.3

of periodic payments (called “annuity benefit payments”) to a designated
individual (called the “payee”) throughout the lifetime of a person (called the
“annuitant”) or for an agreed period, in return for a single payment or series of
payments made in advance (called “annuity considerations”) by the other party
to the contract called the “contractholder” (or “annuity purchaser”). Very
often, the payee, the annuitant and the contractholder are the same person.

i
Annuity Certain (確定年金) A variation of an annuity which 2.3.1(c)
paysbenefits for a fixed number of years, whether the annuitant survives or
dies during that period.

Anti-Selection (逆選擇) A situation where "bad" risks (lives insured) tend 1.3.2a(c)(ii)
to continue with their insurers, whilst "good" risks tend not to. This is a real
danger with the natural premium system. Also known as Selection Against
the Insurer (不利於保險人的選擇).

Applicant (投保人) A person who is applying for life insurance. 1.2.2

Application (投保單) The more usual term in Hong Kong life insurance 5.2.1(a)
for a proposal form, by means of which underwriters obtain preliminary
information from applicants.

Assignee (承讓人) In relation to a life insurance contract, it is a third party 4.9

to whom the policyowner’s interests in the contract have been assigned.

Assignment (轉讓) In relation to a life insurance contract, it is the 4.9

transfer of interests in the contract to a third party, with or without
consideration.

Assignor (轉讓人) In relation to a life insurance contract, it is a person who 4.9

has assigned his interests in the contract to a third party to the contract.

Attained Age (到達年齡) The current age of a life insured. 2.1.1b(a)

Attending Physician's Statement (APS)(主診醫生報告) In relation to a 5.3.2b(b)

death claim, an APS might be required from the physician who treated the
life insured prior to his death, in support of the claim.

Automatic Dividend Option (自動紅利選擇) If a policyowner 4.10 Note

expresses no preference regarding dividend options, this policy provision
provides for a particular option to be applied automatically. Often an
automatic option means that paid-up additional insurance will be purchased
with any declared dividends. An alternative will be to leave the dividends
with the insurer to earn interests.

Automatic Premium Loan (APL) Provision (自動保費貸款條文) A 4.5(a)Note

policy provision to the effect that in the event of non-payment of a due
premium, and in the absence of an instruction from the policyowner, the cash
value of the policy, if any, will be automatically used to pay the premium so
as to keep the policy in force.

Beneficial Interest (實益權益) Where a person has an interest of value 4.4

or use in property which he does not legally own, he is said to have a
beneficial interest in that property.

Beneficiary (受益人) The Beneficiary of a life insurance policy is 4.4

the person whom a policyowner has nominated to receive benefits under the
policy.

ii
Benefit Policies (利益保單) Policies which do not pay claims on an 1.2.3(b)(i)
indemnity basis, but on a stipulated benefit basis (e.g. in life insurance
policies).

Benefit Riders (保險利益附約) Endorsements to a life insurance policy, 3

granting additional benefits, e.g. Accidental Death Benefit (ADB) rider (意
外死亡附約).

Binding Premium Receipt (立約保費收據) A premium receipt which 5.2.2(b)

confirms a temporary life insurance cover. It therefore fulfils some of the
features found with cover notes in general insurance. Being temporary, the
life insurance cover can be terminated by the insurer earlier than the end of
the specified maximum period of cover. Also known as an Unconditional
Premium Receipt ( 不 附 條 件 保 費 收 據 ) and Temporary Insurance
Agreement (TIA) (臨時保險協議).

Bonuses (英式紅利) The approximate equivalent of dividends with 1.3.1b(a)

participating policies, bonuses are normally reversionary amounts added to Note 1
the ultimate benefit payable under a with-profit policy. They are usually
declared as a percentage, to be applied to either the sum insured or the sum
of the sum insured and the accumulated bonus in arriving at the amount of
bonus.

Cash Value (現金價值) It is a savings element that results when the 1.3.2b(c)(i)
premiums received during the early years of level premium life policies have
been found to exceed the total payment of death claims occurring in those
years. The excess amounts are set aside and collectively referred to as a cash
value. The cash value that has been allocated to a policy can be used by the
policyowner in a number of ways, e.g. to be withdrawn in the form of
surrender value, or used as a pledge for policy loans.

Chose in Action (據法權產) A personal right which can only be 4.9

enforced or claimed by action, and not by taking physical possession.
Examples include a debt, a cheque and a patent.

Class Designation (概括式指定) A description of policy beneficiaries by 4.4(a)

group association rather than by name, e.g. "my children", and "my brothers
and sisters".

Collateral Assignment (抵押轉讓) In life insurance terminology, a 4.9(f)(ii)

Collateral Assignment is a temporary assignment of a policy as collateral
security for a loan. The assignee's interest with such an assignment is limited
to the amount of the loan plus interests.

Comprehensive Cover (綜合保障) In motor insurance, it is the widest 1.2.3(c)(ii)

form of cover, combining third party liability and "own damage" cover. A
Comprehensive private car policy may also give other benefits, such as
personal accident and/or medical expenses insurance.

iii
Conditional Premium Receipt (附條件保費收據) A receipt for 5.2.2(a)
premium which confirms that insurance will begin from the time of the
application, provided the life insured is subsequently found to have been
insurable on standard terms at that time.

Conservation (保留) The retention of existing business, i.e. 5.2.3a(a)

avoiding policy lapses and surrenders.

Contestable Period (可異議期) The period of time specified in an 4.2(b)

Incontestability Provision（不可異議條款）beyond which the insurer will
not contest the contract.

Contingent Beneficiary (次順位受益人) A beneficiary who has been 4.4(b)

designated to receive the death benefit payable under a life insurance policy
if it is he, rather than the primary beneficiary, who survives the life insured.

Continuous Premium Whole Life Policy (連續繳費終身壽險單) 2.1.3(a)(i)

A whole life insurance policy where the premiums continue to be payable
throughout the lifetime of the life insured.

Contribution (分擔) An insurance principle which means that two or more 1.2(e)
insurers covering the same insured for the same loss share that loss rateably.
However, this is in providing an indemnity, to which life insurance is not
normally subject. Therefore the existence of more than one life insurance
policy will not affect the amounts payable by the individual insurers.

Contributory (Plans) (供款（計劃）) Group life, or employee benefit, 2.4(c)

schemes where the premium is paid in part by the members of the plans.

Convert (Conversion) (轉換) A policyowner’s exercise of the right to 2.1.1b(b)

choose a substitute insurance plan in accordance with a conversion provision,
or by mutual consent.

Convertible Term Insurance (可轉換定期壽險) A term insurance 2.1.1b(b)

which provides the policyowner with the right to convert the insurance plan
into a permanent plan, without evidence of insurability.

Cooling-Off Initiative (冷靜期規定) A self-regulatory measure initiated 5.2.4

by the Hong Kong Federation of Insurers to grant certain privileges to life
insurance policyowners regarding the retroactive cancellation of arranged
contracts, exercisable within a prescribed period (Cooling-Off Period).

Cooling-Off Period (冷靜期) See Cooling-Off Initiative. 5.2.4

Cost of Living Adjustment (COLA) Benefit Rider (生活指數調整附約) 3.6.1

A rider providing for periodic increases in the disability income benefits
being paid to a disabled insured, which increases are linked to a prescribed
index.

iv
Cover Note (暫保單) A term from general insurance, referring to a 5.2.2(b) Note
document issued to prove the temporary existence of insurance, the
approximate equivalent in life insurance being the Binding Premium
Receipt（立約保費收據）.

Credit Life Insurance (信用壽險)A form of decreasing term insurance 2.1.1a(b)(i)

normally on a group basis arranged by a lending institution to cover the
outstanding balances of loans should the borrowers die without full
repayments. The benefit is payable direct to the lending institution.

Critical Illness Benefit (危疾保險利益) Critical illness insurance, 3.3.1

covering a range of specified diseases, is provided either in the form of a rider
or a standalone insurance plan. In the former case, the insurer offers to make
a lump-sum advance payment from the sum insured of the basic life insurance
plan. In the latter case, the lump-sum benefit payment offered will be an
advance payment only where the critical illness insurance plan offers death
benefit as well as critical illness benefit.

Customer Protection Declaration (CPD) Form 《客戶保障聲明書》 An 5.2.5(c)

important document that must be completed and signed before a customer
agrees or makes a decision in relation to the purchase of a new life insurance
policy. It is part of the concern of the insurance industry to preserve high
ethical and professional standards, and to control inappropriate replacement of
insurance policies instigated by insurance intermediaries.

Days of Grace (寬限日期) See Grace Period (寬限期). 4.3

Death Benefit (死亡保險金) The basic amount payable 2.2.1(e)

under an insurance policy upon the death of the life insured. This may be
subject to additional factors, e.g. accidental death benefits.

“Debt” on Policy (保單負債) An underwriting measure 5.3.3(c)(i)

with a sub-standard risk, whereby a "debt" is placed against the face amount,
possibly reducing to extinguishment as the policy years go by without a claim.

Declinature (拒保) An insurer’s refusal to insure a given risk. 5.3.3(a)

Declined Risk (拒保風險) A given risk which is 5.3.1(b)(iii)

impaired to such an extent that a particular insurer is refusing to insure it.

Decreasing Term Insurance (遞減定期壽險) Term insurance whose face 2.1.1a(b)

amount reduces each year or at specified times. It is the cheapest form of life
cover, useful to meet a diminishing temporary need, e.g. a mortgage loan
scheduled for repayments over a period of years.

Defer Decision (延遲決定) An option for the life underwriter where a 5.3.3(c)(iv)
proposed risk is uninsurable owing to a temporary condition (e.g. accident
injuries). The risk is not permanently refused, but it will need reassessment at
a later date.

v
Deferred Annuity (延期年金) An annuity where annuity benefit 2.3.1(b)
payments begin at some specified future time or specified age of the
annuitant.

De-mutualised (股份化) A description of a life insurance 5.1(a) Note

company which has changed its mutual status, to become a proprietary
company, i.e. a limited company owned by its shareholders.

Disability Income rider (殘疾收入附约) A policy rider providing an income 3.1.2

during the insured person's period of disability.

Disability Waiver of Premium Rider (殘疾豁免保費附約) An endorsement 3.1.1

to a life policy, offering to waive premiums otherwise payable whilst the
insured person is totally disabled, keeping the life insurance in full force.

Dismemberment (喪失肢體) The loss of one or more limbs, but 3.2.1(b)

within the AD&D Rider provisions the term also applies to loss of sight.

Dividend Options (紅利選擇) The choices available to the 4.10

policyowner of a participating policy with declared dividends. These choices
include: receiving the dividends in cash, applying them towards future
premium payments, leaving them to earn interests with the insurer, etc.

Dividends (紅利) Amounts declared to holders of participating 4.10

policies on the basis of the experience of the pooled fund to which those
policies are connected and which the insurer concerned manages. Usually
expressed as a percentage of the premium paid.

Divisible Surplus (可分配盈餘) That amount of an insurance company’s 1.3.1b(a)

surplus (i.e. that portion of the owners’ equity which represents the excess of
its assets over its liabilities and capital) which is available for distribution to
the holders of its participating policies (or with-profit policies) in the form of
dividends (or bonuses).

Double Indemnity Benefit (雙倍賠償利益) An additional benefit to be paid, 3.2.1(a)Note

equal to the policy face amount, should death occur as a result of an accident. 1
An alternative name for Accidental Death Benefit (意外死亡保險利益).

Duty of Disclosure (披露責任) It requires the parties to a proposed insurance 1.2.2

contract to reveal to the other, before contract conclusion, all material facts
whether these are requested or not.

Employee Benefit Plans (僱員福利計劃) Group life insurance 2.4

for employees within the same organisation or industry.

Endowment Insurance (儲蓄壽險) Life insurance that 2.1.2

will pay the face amount when the life insured survives a fixed period of years
(at maturity) but upon death in case he dies within the period.

vi
Enrolment Card (and Certificate) (成員登記卡、保險憑證) Documents 5.4.1(b)
used with group life insurance, providing evidence of cover to individual
insured persons. Separate from the Master Policy (總保單).

Entire Contract Provision (完整合約條款) A life policy 4.1

provision that defines the whole set of documents constituting the insurance
contract.

Equities (股票) Ordinary shares in a proprietary company. 2.2.2(b)

As an investment vehicle, they carry a higher risk than some types of
investment, but usually offer long-term growth prospects.

Equity （ 衡 平 法 ） Equity is a set of rules originally established by the 1.2.1

Chancery Court of England to mitigate the rigour of common law so as to
achieve enhanced fairness. Equity prevails over common law.

Estate (財產) All the property which is owned by an 4.4(c)

individual, especially someone who has died recently.

Estate Planning (財產策劃) The making of a plan when one is alive, for the 1.1(a)
disposal of one’s estate after one’s death or upon his becoming incapacitated.

Ex Gratia Payment (通融賠付) A payment, usually of a claim, which is 4.12 Note 2

made "out of grace or favour", i.e. where there is no legal liability to make
such a payment.

Examining Physician (體檢醫生) A qualified medical professional 5.3.2b

conducting a medical examination on behalf of an insurer.

Excepted/Excluded Perils (除外危險) A cause of loss excluded from an 1.2.3(a)(ii)

insurance cover.

Excess Interest (額外利息) Interest earned over and above the 2.2.1(f)(v)
guaranteed interest. Must be notified in the Annual Report with universal life
insurance.

Exclusions (除外責任) Risks or losses removed from an 5.3.3(c)(ii)

insurance cover. These are relatively rare with life insurance, but may more
commonly be found with rider benefits, e.g. suicide with accidental death
benefits.

Extended Term Insurance (展期保險) An option under a non-forfeiture 4.5(b)(iii)

benefits provision of a permanent life insurance policy, whereby the net cash
value is used as a single premium to purchase a substitute term insurance
cover for the same amount as the original face amount, and for such period as
the amount of cash value can provide.

Face Amount (保額) Specified on the first page of a life insurance policy, it 5.2.5(b)
is the amount the policy promises to pay upon death of the life insured.
Equivalent to “sum insured” and “sum assured”.

vii
Family Income Insurance (家庭收入壽險) A variation of decreasing term 2.1.1a(b)(ii)
insurance which pays the life insured’s surviving spouse or dependant a stated
monthly benefit in the event of death, for the remainder of a specified period
of time.

Financial Underwriting (財務性核保) Underwriting concentrating 5.3.1Note

more on the implications arising from the amount of insurance requested, e.g.
whether the policyowner can meet premium obligations, whether reinsurance
may be required, and whether the amount seems excessive by normal criteria
with such class of risks.

First Beneficiary (第一受益人) See Primary Beneficiary (第一順位受益人). 4.4(b)

Fulfilment Ratio (實現率) When a participating (or with-profit) 5.2.8

policy that offers non-guaranteed dividends/bonuses is being recommended to
a prospective customer, projected values are normally presented to him for
reference purposes. He may, before making a purchase decision, want to
know how likely these values or amounts will come true. It will help to be
shown Fulfilment Ratios that are relevant to the recommended insurance
product. Relating to a particular insurance product and to a definite period of
its existence in the past, the Fulfilment Ratio is substantially the average
proportion that the non-guaranteed dividends/bonuses actually declared bear
to the amounts projected at the points of sale.

Fully Earned (已完全賺取的) When an amount of premium for a 1.3.2b(b)

particular period in the past is said to be fully earned, that amount is taken as
corresponding to the risk run by the insurer during that period, so it (the
earned or fully earned premium) contains no "surplus" to provide for a cash
value or other benefit common with the level premium system in many types
of life insurance.

Fully Paid Up (完全清繳) Once a policy has been fully paid up, no more 5.2.7d(c)
premiums have to be paid but it will continue to provide cover. It is one of the
non-forfeiture options (see Reduced Paid-Up Insurance (減額清繳保險)) .

Fully Paid-Up Shares (完全清繳的股票) Shares in a proprietary 5.1(b)

company (or stock company), for which the subscription price has been
wholly paid by the shareholders.

Grace Period (寬限期) A period of time after a premium is due, during 4.3
which the premium may be paid and cover kept continuous, without penalty.
Also known as Days of Grace (寬限日期) .

Graded-Premium Policy (等級保費保險單) A variation of whole life 2.1.3(c)

policy, where the premium increases on a regular basis, e.g. every three years,
but the face amount remains unchanged.

Gross Premium (毛保費) The premium for a life insurance policy after 1.3.1a Note
taking into account the three rating factors of mortality, interest and expenses.

viii
Group Insurance (團體保險) Life insurance of a number of persons 2.4
forming a recognisable group, e.g. employees of a particular employer.

Guaranteed Annuity (保證年金) An annuity which guarantees that annuity 2.3.1(c)

benefits will be paid until the annuitant dies and will be paid for at least a
certain period, even if he does not survive that period. Also known as a Life
Income With Period Certain.

Guaranteed Insurability Option (GIO) (保證可保選擇) Under this 3.5.1

rider, the policyowner has the right to purchase additional insurance of the
same type as the basic life insurance plan either on specified option dates, at
specified ages, or when a specified event happens, without having to supply
evidence of insurability.

Immediate Annuity (即期年金) An annuity where the annuity benefit 2.3.1(a)

payments commence one annuity period (i.e. the time span between one
scheduled payment and the next in the series) immediately following the
purchase of the annuity.

Incontestability Provision (不可異議條款) A provision in a life insurance 4.2

or annuity policy whereby after an initial period the insurer may not contest
the policy.

Increasing Term Insurance (遞增定期壽險) Term insurance that 2.1.1a(c)

provides a death benefit that increases automatically at specified intervals over
the period of insurance. The increases may be linked to an agreed index (e.g.
the Composite Consumer Price Index).

Indemnity (彌償) Restricting insurance payment to an exact financial 1.2(d)

compensation, the principle of indemnity is not normally applicable to life and
personal accident insurance.

Indemnity Corollaries (彌償引伸) Sub-principles of the parent 1.2.3(c)

principle of indemnity, i.e. contribution and subrogation. As with indemnity,
neither is likely to have any application with life insurance.

Insurability Benefits (可保權利益) Two types of insurability benefits are 3.5

offered as riders to life insurance policies, i.e. Paid-up Additional Insurance
（清繳增額保險）and Guaranteed Insurability Option (保證可保選擇).

Insurable Interest (可保權益) In the context of life insurance, it is the 1.2.1

legal right to insure an individual's life, which is required at the
commencement of insurance, although it is not needed when the insured event
happens.

Insured Perils (受保危險) Causes of loss covered by a particular 1.2.3(a)(i)

policy.

Irrevocable Beneficiary (不可撤換受益人) A beneficiary who cannot be 4.9(e)(i)

changed without his/her consent.

ix
Joint-Life Basis (聯合壽險方式) A life insurance policy that grants cover on 2.1.1a(b)(iii)
a joint-life basis insures the lives of two (or more) persons. Such a policy will
pay either on the first or last death, as specified.

Key Person Life Insurance (關鍵人物人壽保險) A type of insurance that a 1.2.1(d)(iii)

business may purchase for insuring the life of an individual whose death Note
might cause a significant financial loss to the business.

Lapse (失效) It is the kind of termination of a life insurance policy that 1.3.2b(c)
will result from the non-payment of a due premium within the permitted time (iii)
period (including the Grace Period(寬限期) ).

Level Premium System (均衡保費制度) The normal method of life 1.3.2b

insurance pricing, whereby (for the same face amount) the annual premium is
established at inception and does not vary throughout the term of the policy.

Level Term Insurance (定額定期壽險) Term insurance that offers a 2.1.1a(a)

death benefit that does not change during the term of the policy.

Life Income Annuity With Period Certain (確定期間終身年金) See 2.3.1(c)

2.3.1(c)
Guaranteed Annuity (保證年金).

Living Benefit Rider ( 生 前 支 付 保 險 利 益 附 約 ) Another name for 3.3

Accelerated Death Benefit Rider(提前支付死亡保險利益附約).

Loading (附加保費) A sum added to a life insurance policy’s net 1.3.1a(c)

premium to cover all of the insurer’s costs of doing business (commissions,
etc.).

Long Term Care (LTC) (長期護理) A rider allowing a stated portion of 3.3.2
the death benefit to be advanced to the policyowner-insured when he requires
constant care for a medical condition.

Market Value Adjustment (MVA) (市值調整) A permitted right 5.2.4 (g)(ii)

of insurers under the cooling-off initiative to make an adjustment with the
refund of premiums, in relation to linked policies and non-linked single
premium life policies.

Master Policy (總保單) The primary insurance document with a group life 5.4.1(b)
insurance plan.

Material Fact (重要事實) A fact that would influence the judgment of a 1.2.2
prudent insurer in determining whether to accept a risk or at what premium to
accept it.

Mature (Maturity) (期滿) In relation to an endowment insurance 2.1.2

policy, it means the policy becomes payable upon the life insured’s survival of
the period of insurance.

x
Maturity Claims (期滿索償) Claims under endowment type insurance, 5.6.1
where the full number of years specified have been completed and the life
insured is still living.

Medical Application (要體檢投保) A proposal for life insurance where 1.2.2(c)

a physical medical examination of the life to be insured is required.

Money Laundering (洗黑錢) The illegal practice of "cleansing" money 5.5.1Note

obtained illegally (e.g. through drug trafficking) by the use of business or
financial instruments such as life insurance. Insurers and insurance
intermediaries must take great care in trying to detect and eliminate such
practices.

Moral Hazards (道德危險) Rather more subjective features concerning 5.3.1(a)(ii)

human attitudes, behaviour and conduct which may have a bearing on the risk.

Mortality (死亡率) An important consideration in determining life 1.3.1a(a)

insurance premium rates. It refers to the rate at which insured lives may be
expected to die at a given age. The term, therefore, may more accurately be
described as Rate of Mortality(死亡比率).

Mortality Tables (死亡表／生命表) Published statistics on mortality, 1.3.1a(a)

indicating the expected rates of mortality at given ages.

Mortgage Indemnity Insurance (按揭彌償保險) A type of insurance 2.1.1a(b)(iii)

that protects a mortgagee against the risk of the value of the mortgaged Note
property falling beneath, say, 75% of the original valuation for any reason.

Mortgage Redemption Insurance (抵押贖回保險) A form of decreasing 2.1.1a(b)

term insurance, with the benefit linked to the outstanding balance of a (iii)
mortgage loan that the policyowner has raised. It often grants cover on a
joint-life basis, paying on the first death.

Multiple-Employer Groups (Insurance) (多個僱主的團體(保險) ) Group 2.4(d)

life insurance where different employers participate in a single plan covering
their respective employees.

Mutual Insurance Company (相互保險公司) An insurance company 5.1(a)

with no shareholders, technically owned by its participating policyholders (i.e.
owners of participating policies).

Natural Premium System (自然保費制度) A system of life insurance 1.3.2a

premium pricing, whereby the premium for any one policy changes each year
according to the prevailing age of the life insured and other features. This is
unworkable from a practical point of view and may be considered an
academic concept.

Natural Risk (自然風險) The intrinsic risk presented by the life insured at 1.3.2a(a)
a particular point in time, related to the person's age, health and other factors.

xi
Net Cash Value (淨現金價值) Although a policy with cash value may 1.3.2b(c)(iv)
allow the policyowner to cancel the policy in return for a surrender value, or
to buy a substitute insurance cover using the cash value as a single premium,
the amount actually available for any one of these purposes (i.e. the Net Cash
Value) may not equal the cash value for a couple of reasons. The Net Cash
Value is calculated by making adjustments for amounts such as paid-up
additions, outstanding policy loans and interests, and advance premium
payments.

Net Policy Proceeds (淨保單收益) The entitlement of an assignee under 4.9(c)

a life insurance policy, his interests being subordinate to those of the insurer
regarding overdue premiums, outstanding policy loans and accrued interests.

Net Premium (淨保費) Sometimes called the Pure Premium (純保費), 1.3.1a Note
this, in the context of life insurance pricing, may be described as the basic
premium to be charged exactly to cover the cost of death claims arising under
normal statistical expectations, with no allowances for expenses and profit.

Non-Contributory (Plans) (非供款（計劃）) Group life, or 2.4(c)

employee benefit, plans where the members do not contribute premiums.

Nonforfeiture (不能作廢) A consequence of the level premium 4.5

system and policies having a cash value. In the event that future premiums
are not paid, the policy does not lapse (become forfeit), because the cash value
may be used to keep the policy in force.

Nonforfeiture (Options) (不能作廢（選擇權）) These are the choices 4.5(b)

available to the policyowner who does not wish to continue payment of
premiums under a policy with a cash value, that will prevent the policy from
lapsing. These options include: taking a surrender value in cash, accepting
reduced paid-up insurance and accepting extended term insurance in
substitution of the original plan.

Nonforfeiture Provisions (不能作廢條款) Policy provisions that provide 4.5

Nonforfeiture Options.

Non-Medical Application (免體檢投保) A request for life insurance 1.2.2(b)

which (subject to certain stipulations) does not have to be accompanied by a
physical medical examination of the life to be insured.

Option Dates (備擇日期／行權日期) Dates specified under a Guaranteed 3.5.1(a)

Insurability Option (保證可保選擇) on which additional insurance may be
purchased without evidence of insurability.

Package Policy (一籃子保單) Put simply, it is a single policy containing 3.3.1 Note
different types of cover (e.g. a personal accident and sickness policy).

xii
Paid-Up Additional Insurance (清繳增額保險 ) A participating policy 4.10(d)
normally allows the policyowner to use any declared dividend as a net single
premium to purchase Paid-Up Additional Insurance for the same plan and in
whatever face amount the dividend can provide at the attained age of the life
insured.

Paid-Up Insurance (清繳保險) Insurance that a policyowner opts in 1.3.2b(c)(iv)

substitution of the original insurance, with a reduced amount of insurance,
without liability to pay further premiums, but otherwise on the same terms as
the original insurance.

PAR/NON-PAR (分紅／不分紅) The customary abbreviation for 1.3.1b(a)

policies that are participating or non-participating.

Participating/Non-Participating (分紅／不分紅) Also known as With- 1.3.1b(a)

Profit (有利潤) or Without-Profit (無利潤), the terms indicate whether the
policyowners can expect to share in the divisible surplus of the insurer or not.

Participating Policyholders (分紅保單持有人) Those policyholders 5.1(a)

whose policies are participating (or with-profit).

Pension (退休金) A monthly or other periodic payment to a person in 2.3

retirement, until death.

Permanent Plan (永久計劃) A life insurance plan which is effective 2.1.1b(b)(iii)

throughout the life insured’s lifetime provided premiums continue to be paid,
and which contains a savings element.

Personal Data (Privacy) Ordinance（《個人資料（私隱）條例》） This 1.2.2(d)

is a piece of legislation that is to safeguard the privacy of personal data.
When seeking sensitive information about health condition in the course of
processing life insurance applications, practitioners should take great care not
to breach the Ordinance.

Personal Needs （ 個 人 需 要 ） Life insurance fulfils a vital function of 1.1.1(a)

satisfying an individual’s various needs in everyday life, such as the needs to
make provision for the education of one’s children, for one’s own retirement
and for dependents’ living expenses in case of one’s premature death.

Personal Representative (遺產代理人) The executor of a will or the 5.6.2(a)

administrator of the estate of a deceased person.

Physical Hazards (實質危險) The objective measurable factors that are 5.3.1(a)(i)
very likely to increase the risk of the insured event happening, such as
obviously known health dangers (e.g. heavy smoking and serious overweight).

Policy Loan (保單抵押貸款) A policy that generates a cash value usually 1.3.2b(c)(ii),
allows the policyowner to borrow money (Policy Loan) from the insurer 4.6
against the security of the cash value.

xiii
Policy Revival (保單復效) See Reinstatement. 4.7

Policyowner-insured (受保保單所有人) Where the life insured and the 3 Note

policyowner are the same person, this person can be referred to as a
policyowner-insured.

POS (Policyowner Service)(保單所有人服務部) The Client Service 5.1.1(e), 5.5

Department, responsible for such matters as documentation, correspondence,
premium payments, etc.

Pre-Existing Conditions (保險生效前已患的疾病) It is common for 3.4(c)(i)

medical benefit policies to exclude expenses relating to medical problems that
existed before the insurance commenced.

Preferred Risks (優良風險) Above average risks, constituting highly 5.3.1(b)(iv)

desirable types of business for the insurer (e.g. confirmed non-smokers in
excellent health).

Premium Holiday（保費免繳期） A facility which allows a 5.2.6b

policyholder of a regular premium plan to skip premium payments for a
period of time provided that the policy value is sufficient to cover the
mortality charges and fees. No penalty or debit interest will be incurred.

Premium Waiver (保費豁免) A policy provision whereby premiums 3.3.1(f)

otherwise payable are not required by the insurer under prescribed
circumstances, e.g. when the life insured has become disabled.

Presumption of Death (推定死亡) Where a person has not been seen 5.6.2(e)
for several years, an application can be made to the court to presume him to be
legally dead.

Primary Beneficiary (or First Beneficiary)(第一順位受益人／第一受益人) 4.4(b)

Where a policy has two or more policy beneficiaries, the one who is stated as
having priority in receiving the policy proceeds is called the Primary
Beneficiary. There could be more than one Primary Beneficiary.

Principal Brochure (主要推銷刊物) A document required with all 5.2.4(g)

investment-linked assurance schemes, containing the information necessary
for prospective scheme participants to make an informed judgment of the
investment proposed to them.

Proprietary (or Stock) Company (營利(或股份) 公司) A company 5.1(b)

having shareholders, who have their liability towards the company's debts
limited to the extent of any amounts unpaid in respect of their company
shares.

Provident Fund Scheme (公積金計劃) A retirement provision, but 2.3.2

unlike with a pension, the benefit is in the form of a lump-sum amount
payable at retirement or other specified time.

xiv
Proximate Cause (近因) It is the principle which seeks to establish the 1.2(c)
dominant or effective reason for a loss occurring. The cause of death may
sometimes be important in life insurance, for example, if the policy provides
additional benefits for accidental death (or if death happens within the
contestable period or suicide exclusion period).

Public Policy (公共政策) It is a principle of law that enables the court 5.6.2(d)(iv)
to set aside, or deny effect to, acts or transactions that tend to injure the public
good or public order.

Pure Endowment (純生存保險) A rare form of life insurance where 2.1.2(b)

the benefit is only payable if death does not occur during the period (term)
specified.

Pure Premium or Pure Cost of Protection (純保費／保障的純成本) See 1.3.1a Note

Net Premium (淨保費).

Reduced Paid-Up Insurance (減額清繳保險) A non-forfeiture option 4.5(b)(ii)

that allows the policyowner to use the net cash value as a single premium to
purchase substitute insurance with a lower sum insured than the original one.

Reinstatement (復效) The restoration of a lapsed policy into full force. 4.7
Also known, with UK style policies, as Policy Revival (保單復效). This is
provided for under policy conditions, but is subject to certain limitations, e.g.
a specified time period (perhaps five years for exercising the option),
repayment of back premiums and interest, and perhaps other measures.

Reinsurance (再保險) Insurance that transfers all or part of the risk assumed 5.1.1(g)(iii)
by an insurer under one or more insurance contracts to another insurer.

Release (or Release Form) ( 棄 權 聲 明 ／ 解 除 責 任 憑 證 ) 3.3(c), 5.6.3(c)

Documentary confirmation from a beneficiary that the policy's death benefit
stands reduced by the amount of any accelerated death benefit payment.
Alternatively, a discharge given by a benefit recipient, e.g. with a policy
surrender and death claim.

Renewable Term Insurance (可續保定期壽險) Term insurance that offers 2.1.1b(a)

the right of renewal for further period(s) without evidence of insurability.

Renewal Premiums (續保費) Premiums paid or payable for life insurance 1.3.2b(c)(iii)
after payment of the initial premium.

Replacement (轉保活動) Under the Code of Practice for Life 5.2.5(b)

Insurance Replacement, replacement also involves any policy which has
lapsed, been surrendered or converted to paid-up insurance.

Reserve (儲備金) That part of the premium collected which is considered to 1.3.2b(b)
be unearned will be used to build policy reserve for the purposes of paying
policy benefits in the future.

xv
Reversionary (Interest/Bonus)(復歸(權益/紅利)) A financial interest 4.9, 4.10
which exists now, but where full enjoyment and privileges of ownership is
deferred until some future time or event, e.g. reversionary bonuses under with-
profits policies.

Rider(附約) Such an amendment to a policy that becomes part of the 3.1

insurance contract and that either expands or limits the benefits payable under
the contract.

Settlement Options (賠付選擇) The choices available to the 4.11

policyowner when the policy proceeds become available. These options
include: lump sum single payment, proceeds left to earn interest with the
insurer and proceeds paid in instalments over a fixed period, etc.

Single-Employer Plans (單一僱主計劃) Group life insurance where 2.4(d)

all insured persons are employees of the same employer.

Special Class Risks (特殊風險) See Sub-Standard Risks (次標準風險). 5.3.1(b)(ii)

Standard Risks (標準風險) Risks presenting no abnormal features and 5.3.1(b)(i)

insurable on normal terms.

Straight Life Insurance (純粹壽險) Whole life insurance for which 2.1.3(a)(i)
premiums are payable for as long as the life insured lives.

Subrogation (代位權) A legal principle which allows an insurer who has 1.2(f)
provided an indemnity to take over for his own benefit rights the policyholder
has against third parties. As indemnity does not apply to life insurance, so this
corollary of indemnity – subrogation - does not apply to it either.

Sub-Standard Risks (次標準風險) Proposed risks which are more likely 5.3.1(b)(ii)
to result in a loss that the average, so that they are either rejected or insurable
with special terms. Sometimes called Special Class Risks.

Sum Assured (保額) See Face Amount. 5.3.3(c)(i)

Sum Insured (保額) See Face Amount. 5.2.5(b)

Surrender (退保) Termination of an insurance policy by the policyowner 5.6.3

for a Surrender Value.

Surrender Value (退保價值) Payable in cash, a policy’s surrender value 1.3.2b(c)(i)

equals the cash value minus a surrender charge, a charge that is applicable
when a policy is surrendered for its cash value or when a policy, under some
plans, is adjusted to provide a lower level of death benefit. Also see Cash
Value (現金價值).

xvi
Switching (Policy Switching)(轉保) Changing an existing life insurance 5.2.5
policy for a replacement one. The term, however, has an undesirable
implication whereby policyholders are persuaded to make the change which
may be more for the benefit of the insurance intermediary or the new insurer
than the policyholder. The latter practice is known as Twisting (誘導轉保)
(i.e. an inappropriate replacement of a life insurance policy).

Technical Underwriting (技術性核保) Assessment of the intrinsic 5.3.1 Note

and perceived hazards of given risks, as to their insurability and terms.

Temporary Insurance Agreement (TIA)(臨時保險協議) See Binding 5.2.2(b)

Premium Receipt (立約保費收據).

Term Insurance (定期壽險) Life insurance which will pay benefit only 2.1.1
if the life insured dies during the period (term) specified. Also known as
Temporary Life Insurance (短期人壽保險).

Third Degree Burns (三級燒傷或燙傷) Can be defined as full thickness skin 3.2.2(b)(i)
destruction due to burns.

Third Party Policy (第三者保單) A policy where the insurance is on 3

the life of a person other than the applicant.

Title (所有權) It is a legal term meaning the right to hold goods or property 5.6.3(a)
(e.g. policy proceeds).

Total Disability (完全殘疾) As defined under the Disability Income 3.1.2(a)

Rider, this means that the insured person is unable to perform the essential
acts of his own occupation, or any occupation for which he is reasonably fitted
by education, training or experience.

Twisting (誘導轉保) See Switching (轉保). 5.2.5(a)

"Unbundled" Pricing Structure (「分別列示各定價因素」定價結構) A 2.2.1(c)

feature of universal life insurance, whereby the insurer separately discloses the
three pricing factors: mortality (or pure cost of protection), interest and
expenses.

Unconditional Premium Receipt (不附條件保費收據) See Binding 5.2.2(b)

Premium Receipt (立約保費收據).

Underwriting (核保) The process of identifying and classifying the 1.3.1a(a),

degree of risk represented by an application, and of determining its 5.1.1(g), 5.3
insurability and the contract terms to be adopted.

Uninsured Perils (不保危險) These are causes of loss neither specifically 1.2.3(a)(iii)
covered nor specifically excluded by a policy. An important consideration
with non-life insurance and the principle of proximate cause, but unlikely to
have any significant application to life insurance.

xvii
Unit-Linked Long Term Policy (單位相連長期保單) Also known as an 2.2.2
‘Investment-Linked Long Term Policy’ ( 投 資 相 連 長 期 保 單 ), it is an
insurance policy with its policy value generally linked to the performance of
its underlying investments.

Universal Life Insurance (萬用壽險) Life insurance which is subject to 2.2.1

a flexible premium, has an adjustable benefit and an ‘unbundled’ pricing
structure, and accumulates a cash value.

Utmost Good Faith (最高誠信) A common law principle whereby 1.2(b)

each party to an insurance contract must, prior to contract conclusion, reveal
to the other all Material Facts whether these are requested or not. At law, a
breach of this principle makes the contract voidable, subject to such contract
terms as the Incontestability Provision.

Waiting Period – in relation to Critical Illness Rider (等候期—與危疾附約 3.3.1(e)(iv)

有關的) Where diagnosis is a defining element of an insured event of the
Critical Illness Rider, the diagnosis has to be one done when the rider has
already been in effect for a specified number of days.

Waiting Period – in relation to Disability Waiver of Premium Rider (等候 3.1.1(a)

期—與殘疾豁免保費附約有關的) A qualification to the Disability
Waiver of Premium Rider, whereby premiums are not waived until the insured
person has been disabled for a specified number of months. Some insurers
refund premiums paid during the waiting period if the disability lasts longer,
so that premiums begin to be waived.

Whole (of) Life Insurance (終身壽險) Life insurance where the 2.1.3
benefit is payable only on death, whenever that occurs.

With-Profit Policy) (有利潤保單) The equivalent term in U.K. insurance 1.3.1b(a)

terminology of a participating policy. Note 1

Without-Profit (Policy) (無利潤保單) The equivalent term in U.K. 1.3.1b(a)

insurance terminology of a non-participating policy. Note 1

Yearly Renewable Term (YRT) Insurance (每年可續保定期壽險) One 2.1.1b(a)

year term insurance with guaranteed insurability renewal provisions. Also
known as Annually Renewable Term (ART) Insurance.

xviii
 INDEX

Absolute assignment 絕對轉讓 4.9(f)(i)

Accelerated death benefits 提前支付死亡保險利益 3.3
Accident benefits 意外保險利益 3.2
Accidental death and dismemberment 意外死亡及喪失肢體附約 3.2
rider
Accidental death benefit 意外死亡保險利益 3.2.1(a)
Accounts department 會計部 5.1.1(a)
Actively-at-work provision 在職工作條款 2.4(f)
Activities of daily living 日常起居活動 3.3.2(c)
Actuarial department 精算部 5.1.1(b)
Adjustable benefit 可調整的保險利益 2.2.1(b)
Age not admitted 年齡未獲承認 5.6.1(d)
Annually renewable term 每年可續保定期保險 2.1.1b(a)
Annuitant 年金標的人 2.3(a)
Annuity 年金 2.3
Annuity certain 確定年金 2.3.1(c)
Annuity period 年金期 2.3.1(a)
Anti-selection 逆選擇 1.3.2a(c)(ii)
Applicant 投保人 1.2.2
Application 投保單（投保申請書） 5.2.1(a)
Application procedure 投保手續 5.2.1
Appointed actuary 獲委任的精算師 5.2.6b(c)
Assignee 承讓人 4.9
Assignment 轉讓 4.9
Assignor 轉讓人 4.9
Attained age 到達年齡 2.1.1b(a)
Attending physician’s statement (APS) 主診醫生報告 5.3.2b(b)
Automatic dividend option 自動紅利選擇 4.10Note
Automatic premium loan 自動保費貸款 4.5(a)Note
Beneficial interest 實益權益 4.4
Beneficiary 受益人 4.4
Beneficiary designation 受益人的指定 4.4
Benefit policies 利益保單 1.2.3(b)(i)
Benefit riders 保險利益附約 3
Binding premium receipt 立約保費收據 5.2.2(b)
Bonuses 英式紅利／紅利 1.3.1b(a)Note1
Cash surrender value 退保現金價值 4.5(b)(i)
Cash value 現金價值 1.3.2b(c)(i)
Chose in Action 據法權產 4.9
Claims 理賠 5.1.1(d)
Class designation 概括式指定 4.4(a)
(1)
Code of Practice for Life Insurance 《壽險轉保守則》 5.2.5
Replacement
Collateral assignment 抵押轉讓 4.9(f)(ii)
Collateral security 質押擔保 1.3.2b(c)(ii)
Complaints or disputes 投訴／爭議 5.2.4(f)(iii)
Comprehensive cover 綜合保障 1.2.3(c)(ii)
Conditional premium receipt 附條件保費收據 5.2.2(a)
Conservation 保留 5.2.3a(a)
Contestable period 可異議期 4.2(b)
Contingent beneficiary 次順位受益人 4.4(b)
Continuous premium whole life policy 連續繳費終身壽險單 2.1.3(a)(i)
Contribution 分擔 1.2(e)
Contributory (plans) 供款（計劃） 2.4(c)
Conversion privilege 轉換特權 2.1.1b(b)
Convert (conversion) 轉換 2.1.1b(b)
Convertible term insurance 可轉換定期壽險 2.1.1b(b)
Cooling-off initiative 冷靜期規定 5.2.4
Cooling-off period 冷靜期 5.2.4
Cost of living adjustment benefit 生活指數調整 3.6.1
Cover note 暫保單 5.2.2(b)Note
Credit life insurance 信用壽險 2.1.1a(b)(i)
Critical illness benefit 危疾保險利益 3.3.1
Customer loyalty 客戶忠誠度 5.2.3a(a)
Customer protection declaration form 客戶保障聲明書 5.2.5(c)
Days of grace 寬限日期 4.3
Death benefit 死亡保險金 2.2.1(f)
Death claims 死亡索償 5.6.2
“Debt” on policy 保單負債 5.3.3(c)(i)
Declinature 拒保 5.3.3(a)
Declined risk 拒保風險 5.3.1(b)(iii)
Decreasing term insurance 遞減定期壽險 2.1.1a(b)
Defer decision 延遲決定 5.3.3(c)(iv)
Deferred annuity 延期年金 2.3.1(b)
De-mutualised 股份化 5.1(a)Note
Disability income 殘疾收入 3.1.2
Disability waiver of premium rider 殘疾豁免保費附約 3.1.1
Dismemberment 喪失肢體 3.2.1(b)
Dividend options 紅利選擇 4.10
Dividends 紅利 4.10
Divisible surplus 可分配盈餘 1.3.1b(a)
Double indemnity benefit 雙倍賠償利益 3.2.1(a)Note1
Duty of disclosure 披露責任／申報實情責任 1.2.2
Employee benefit plans 僱員福利計劃 2.4
Endorsements 批單 2(b)(iv)

(2)
Endowment insurance 儲蓄壽險 2.1.2
Enrolment card and Certificate 成員登記卡、保險憑證 5.4.1(b)
Entire contract provision 完整合約條款 4.1
Equitable (premiums) 公平的（保費） 1.3.1(b)
Equities 股票 2.2.2(b)
Equity 衡平法 1.2.1
Estate 財產 4.4(c)
Estate planning 財產規劃 1.1(a)
Ex gratia payment 通融賠付 4.12Note2
Examining physician 體檢醫生 5.3.2b
Excepted/excluded perils 除外危險 1.2.3(a)(ii)
Excess interest 額外利息 2.2.1(f)(v)
Exclusions 除外責任 5.3.3(c)(ii)
Expenses 開支 1.3.1a(c)
Extended term insurance 展期保險 4.5(b)(iii)
Face amount 保額 5.2.5(b)
Family income insurance 家庭收入壽險 2.1.1a(b)(ii)
Financial underwriting 財務性核保 5.3.1Note
First (or primary) beneficiary 第一受益人／第一順位受益人 4.4(b)
Fixed interest investments 固定利息投資 2.2.2(b)
Flexible premium 靈活保費 2.2.1(a)
Fraud 欺詐行為 4.2(b)
Fulfilment ratio 實現率 5.2.8
Fully earned 已完全賺取的 1.3.2b(b)
Fully paid up 完全清繳 5.2.7d (c)
Fully paid-up shares 完全清繳的股票 5.1(b)
Grace period 寬限期 4.3
Graded-premium policy 等級保費保險單 2.1.3(c)
Gross premium 毛保費 1.3.1aNote
Group insurance 團體保險 2.4
Guaranteed annuity 保證年金 2.3.1(c)
Guaranteed insurability option 保證可保選擇 3.5.1
Hospital charges 住院費用 3.4(a)(i)
Illustration Document 說明文件 5.2.6a
Immediate annuity 即期年金 2.3.1(a)
Important Facts Statement 重要資料聲明書 5.2.10
Inception date 起保日期 5.2.2
Incontestability provision 不可異議條款 4.2
Increasing term insurance 遞增定期壽險 2.1.1a(c)
Indemnity 彌償 1.2(d)
Indemnity corollaries 彌償的引伸 1.2.3(c)
Inflation 通貨膨脹 3.6
Initiative on Financial Needs Analysis 財務需要分析的規定 5.2.9
Insurability benefits 可保權利益 3.5

(3)
Insurable interest 可保權益 1.2.1
Insurable interest (in oneself) 可保權益（就自己而言） 1.2.1(c)
Insurable interest (in others) 可保權益（就其他人而言） 1.2.1(d)
Insurable interest (when needed) 可保權益（何時需要） 1.2.1(h)
Insurance Ordinance 《保險業條例》 1.2.1(a)
Insurance intermediaries 保險中介人 2
Insured event 受保事件 1.2.3(c)(i)
Insured perils 受保危險 1.2.3(a)(i)
Interest 利息 1.3.1a(b)
Investment 投資 1.3.1a(b)
Irrevocable beneficiary 不可撤換受益人 4.9(e)(i)
Joint-life basis 聯合壽險方式 2.1.1a(b)(iii)
Key person life insurance 關鍵人物人壽保險 1.2.1(d)(iii)Note
Lapse 失效 1.3.2b(c)(iii)
Law of averages/ law of large numbers 平均法則／大數法則 1.3.1a(a)
Level premium system 均衡保費制度 1.3.2b
Level term insurance 定額定期壽險 2.1.1a(a)
Life annuity 終身年金 2.3.1(c)
Life income annuity with period certain 確定期間終身年金 2.3.1(c)
Life insurance 人壽保險 1.1
Life Insurance Council 壽險總會 5.2.4
Life insured 受保生命 1.2.1(b)
Life underwriter’s report 壽險代理人報告 5.2.1(c)(i)
Linked policy illustration document 相連保單退保說明文件 5.2.6a
Living benefit rider 生前支付保險利益附約 3.3
Loading 附加保費 1.3.1a(c)
Long term business 長期業務 1.3.1b
Long term care 長期護理 3.3.2
Lump sum 一整筆款項 2.1.1a(b)(ii)
Mandatory Provident Fund System 強制性公積金制度 2.3.2
Market value adjustment 市值調整 5.2.4(g)(ii)
Master policy 總保單 5.4.1(b)
Material fact 重要事實 1.2.2
Mature (maturity) 期滿 2.1.2
Maturity claims 期滿索償 5.6.1
Medical application 要體檢投保 1.2.2(c)
Medical benefits 醫療保險利益 3.4
Misstatement of age/sex 誤報年齡／性別 4.8
Money laundering 洗黑錢 5.5.1Note
Moral hazards 道德危險 5.3.1(a)(ii)
Mortality 死亡率 1.3.1a(a)
Mortality tables 死亡表／生命表 1.3.1a(a)
Mortgage indemnity insurance 按揭彌償保險 2.1.1a(b)(iii)Note
Mortgage redemption insurance 抵押贖回保險 2.1.1a(b)(iii)
(4)
Multiple-employer groups 多個僱主的團體 2.4(d)
Mutual insurance company 相互保險公司 5.1(a)
Natural premium system 自然保費制度 1.3.2a
Natural risk 自然風險 1.3.2a(a)
Net cash value 淨現金價值 1.3.2b(c)(iv)
Net policy proceeds 淨保單收益 4.9(c)
Net premium 淨保費 1.3.1aNote
Non-contributory (plans) 非供款（計劃） 2.4(c)
Nonforfeiture 不能作廢 4.5
Nonforfeiture (options) 不能作廢（選擇） 4.5(b)
Nonforfeiture provisions 不能作廢條款 4.5
Non-medical application 免體檢投保 1.2.2(b)
Non-participating policy 不分紅保單 1.3.1b(a)
Non-traditional types of life insurance 非傳統的人壽保險類別 2.2
Notice of assignment 轉讓通知 4.9(a)
Option dates 備擇／行權日期 3.5.1(d)
Optional medical plan 自選醫療計劃 3.4(b)
Package Policy 一籃子保單 3.3.1 Note
Paid-up additional insurance 清繳增額保險 4.10(d)
Paid-up insurance 清繳保險 1.3.2b(c)(iv)
Par/non-par 分紅／不分紅 1.3.1b(a)
Participating/non-participating 分紅／不分紅 1.3.1b(a)
Participating policyholders 分紅保單持有人 5.1(a)
Pension 退休金 2.3
Permanent plan 永久計劃 2.1.1b(b)(iii)
Personal Data (Privacy) Ordinance 《個人資料（私隱）條例》 1.2.2(d)
Personal representative 遺產代理人 5.6.2(a)
Physical hazards 實質危險 5.3.1(a)(i)
Policy loan 保單抵押貸款 1.3.2b(c)(ii),4.6
Policy revival 保單復效 4.7
Policy switching 轉保 5.2.5
Policyowner-insured 受保保單所有人 3Note
Policyowner Service 保單所有人服務部 5.1.1(e),5.5
Pre-existing conditions 保險生效前已患的疾病 3.4(c)(i)
Preferred risks 優良風險 5.3.1(b)(iv)
Premium 保費 1.3
Premium holiday 保費免繳期 5.2.6b
Premium waiver 保費豁免 3.3.1(f)
Presumption of death 推定死亡 5.6.2(e)
Primary (or first) beneficiary 第一順位受益人／第一受益人 4.4(b)
Principal brochure 主要推銷刊物 5.2.4(g)
Private nursing 私人護理 3.4(a)(ii)
Proof of age 年齡證明 5.6.1(d)
Proof of death 死亡證明 5.6.2(c)

(5)
Proposal 投保 5.2
Proprietary (or stock) company 營利（或股份）公司 5.1(b)
Provident fund scheme 公積金計劃 2.3.2
Proximate cause 近因 1.2(c)
Public policy 公共政策 5.6.2(d)(iv)
Pure cost of protection 保障的純成本 2.2.1(c)(i)
Pure endowment 純生存保險 2.1.2(b)
Pure premium 純保費 1.3.1aNote
Rate of mortality 死亡比率 1.3.1a(a)
Rates (life insurance) 費率（人壽保險） 1.3
Reduced paid-up insurance 減額清繳保險 4.5(b)(ii)
Reinstatement 復效 4.7
Reinsurance 再保險 5.1.1(g)(iii)
Release (or Release form) 棄權聲明／解除責任憑證 3.3(c),5.6.3(c)
Renewable term insurance 可續保定期壽險 2.1.1b(a)
Renewal premiums 續保保費 1.3.2b(c)(iii)
Replacement 轉保 5.2.5(b)
Reserve 儲備 1.3.2b(b)
Reversionary (interest/bonus) 復歸（權益／紅利） 4.9
Rider 附約／附加條款 3.1
Risk assessment 風險評估 5.1.1(g)(i)
Sales illustrations 銷售說明書 5.2.6
Savings 儲蓄 1.1(b)
Selection against the insurer 不利於保險人的選擇 1.3.2a(c)(ii)
Settlement options 賠付選擇 4.11
Single employer (plans) 單一僱主（計劃） 2.4(d)
Single premium endowments 整付保費儲蓄壽險 2.1.2(a)
Special class risks 特殊風險 5.3.1(b)(ii)
Standard Illustration for Universal Life 萬用壽險（非投資相連） 5.2.6b
(Non-Linked) Policies 銷售說明文件
Standard risks 標準風險 5.3.1(b)(i)
Standard terms 標準條款 5.2.2(a)
Statutory requirement (insurable 法定要求（可保權益） 1.2.1(a)
interest)
Stock company 股份公司 5.1(b)
Straight life insurance 純粹壽險 2.1.3(a)(i)
Subrogation 代位權 1.2(f)
Sub-standard risks 次標準風險 5.3.1(b)(ii)
Suicide exclusion 自殺除外責任 4.12
Suicide exclusion period 自殺免責期 1.2.3(a)Note1
Sum assured 保額 5.3.3(c)(i)
Sum insured 保額 5.2.5(b)
Surrender 退保 5.6.3
Surrender value 退保價值 1.3.2b(c)(i)

(6)
Switching 轉保 5.2.5
Technical underwriting 技術性核保 5.3.1Note
Temporary insurance agreement 臨時保險協議 5.2.2(b)
Temporary life insurance 短期人壽保險 2.1.1
Term insurance 定期壽險 2.1.1
Third degree burns 三級燒傷或燙傷 3.2.2(b)(i)
Third party policy 第三者保單 3
Time franchise 起賠期限／起賠期間 3.1.1(a)
Title 所有權 5.6.3(a)
Total disability 完全殘疾 3.1.2(a)
Traditional types of life insurance 傳統的人壽保險類別 2.1
Twisting 誘導轉保 5.2.5(a)
“Unbundled” pricing structure 「分別列示各定價因素」 2.2.1(c)
的定價結構
Unconditional premium receipt 不附條件保費收據 5.2.2(b)
Underwriting 核保 1.3.1a(a), 5.1.1(g),5.3
Unearned (premium) 還未賺取的（保費） 1.3.2b(c)(i)
Uninsured perils 不保危險 1.2.3(a)(iii)
Unit-linked long term policy 單位相連長期保單 2.2.2
Universal life insurance 萬用壽險 2.2.1
Utmost good faith 最高誠信 1.2(b)
Valuation 估值 5.1.1(a)(ii)
Waiting Period – 等候期—— 3.3.1(e)(iv)
in relation to Critical Illness Rider 與危疾附約有關的
Waiting period – 等候期—— 3.1.1(a)
in relation to Disability Waiver of 與殘疾豁免保費附約有關的
Premium Rider
Whole (of) life insurance 終身壽險 2.1.3
With-profit policy 有利潤保單 1.3.1b(a)Note1
Without-profit policy 無利潤保單 1.3.1b(a)Note1
Yearly renewable term insurance 每年可續保定期壽險 2.1.1b(a)

(7)
 Representative Examination Questions

Answers

QUESTIONS

CHAPTER 1 2 3 4

1 (c) (d) (d) (a)

2 (d) (a) (b) (c)

3 (d) (a) (c) (b)

4 (b) (a) (c) (d)

5 (d) (c) (c) (b)

 ACKNOWLEDGEMENTS

Gratitude is given to the representatives of the following organisations for their

contributions towards these Study Notes:

1. Insurance Authority
2. The Hong Kong Federation of Insurers
3. The Chartered Insurance Institute Hong Kong Limited
4. Vocational Training Council
5. Insurance Training Board
6. The Hong Kong Confederation of Insurance Brokers
7. Professional Insurance Brokers Association
8. The Hong Kong General Insurance Agents Association Limited
9. The Life Underwriters Association of Hong Kong
10. General Agents & Managers Association of Hong Kong

Appreciation also goes to the Institute of Professional Education And Knowledge of

the Vocational Training Council for the original writing and development of the Study
Notes.