AIA Paper 3

Life insurance is

a contract where an insurer pays a sum of money if the insured person dies while the policy is active.

Why Do People Buy Life Insurance?

• Originally, it was just for financial protection after death, but now it also helps with:

  • Temporary Needs

    • Covering risks like a family’s expenses if the breadwinner dies early.

  • Savings

    • Growing money over time for future needs (e.g., children’s education).

  • Investment

    • Some policies increase in value or earn returns, helping beat inflation

• Retirement

  • Providing income in old age when regular earnings stop.

Who Needs Life Insurance?

• Personal Needs

• Family Support: Money for dependents after death.

• Funeral Costs: Covering final expenses.

• Education Funds: Paying for children’s schooling.

• Retirement Income: Savings for old age.

• Mortgage Payoff: Clearing home loans if the insured dies.

• Emergency Fund: Backup for unexpected costs.

• Disability Support: Income if unable to work.

Business Needs

• Key Person Insurance: Protecting a company if a crucial employee dies.

• Business Loans: Paying off debts if an owner passes away.

• Partnership Protection: Buying out a deceased partner’s share.

• Employee Benefits: Offering life insurance as a job perk.

1. Insurable Interest

• What? You must have a legal or financial stake in the person’s life you’re insuring.

• Examples:

  • Yourself: Unlimited coverage allowed.

  • Spouse: Unlimited coverage (no proof needed).

  • Debtors/Business Partners: Can insure for the loan amount or potential financial loss.

  • Parents/Guardians: Can insure minor children (Hong Kong law).

• When? Only required when the policy starts (not later).

• Example: Divorced? You can still claim ex-spouse’s policy.

2. Utmost Good Faith (Duty of Disclosure)

• What? Must honestly share all important details (e.g., health risks) when applying.

• Key Rules:

  • Non-Medical Policies: Insurer can’t blame you for undisclosed conditions they didn’t ask about.

  • Medical Exams: Errors by doctors don’t count as your fault.

  • Fraud: If caught lying, the insurer can cancel the policy (but after a "contestable period," they can’t challenge it unless fraud is proven).

3. Proximate Cause

• What? The main reason for a claim (less critical in life insurance vs. car/house insurance).

• Life Insurance Exceptions:

  • Suicide: Often excluded for the first 1–2 years of the policy.

  • Accidents: Covered unless excluded (e.g., extreme sports).

4. Indemnity & Its Rules

• What? In most insurance (e.g., car/house), you’re paid only what you lost.

• Life Insurance Difference:

  • Pays a fixed sum (not tied to actual financial loss).

  • No overpayment risk (you can have multiple life policies).

  • No Subrogation: Insurers can’t sue others to recover payouts (unlike car insurance).

• how insurers determine what you pay:

1. Key Factors in Premium Calculation

A. The "Big Three" Components

1. Mortality Risk (Death Rate)

• Insurers use mortality tables to predict how long people live on average at each age.

• Example: A 30-year-old pays less than a 60-year-old because they’re less likely to die soon.

2. Interest Earnings

• Insurers invest your premiums. Higher expected returns = lower premiums.

• Example: If investments earn 5% vs. 3%, premiums may be cheaper.

3. Expenses

• Covers insurer’s costs (commissions, admin, taxes) and unexpected risks (e.g., pandemics).

• Added as a "loading" fee to the base premium.

B. Other Influences

• Participating (PAR) vs. Non-Participating (NON-PAR) Policies:

  • PAR: More expensive but pays dividends (share of profits).

  • NON-PAR: Cheaper, fixed premiums, no dividends.

• Competition: Insurers adjust prices to stay competitive.

• Health Trends: Events like AIDS or COVID can raise premiums for new policies.

• how insurers determine what you pay:

2. Two Pricing Systems

A. Natural Premium System (Old & Flawed)

• How it worked: Premiums increased yearly with age (like car insurance).

• Problem: Healthy people dropped out, leaving only high-risk policyholders → Insurers lost money.

• No longer used for long-term policies.

B. Level Premium System (Modern Standard)

• How it works: Pay the same premium every year, even as you age.

• Why it’s better:

  • Early premiums are higher than needed (to cover later years when risk rises).

  • Excess funds build cash value (like savings).

• how insurers determine what you pay:

3. Benefits of Level Premiums

• Cash Value

  • After a few years, part of your premium becomes savings ("cash value").

  • Example: Surrender a policy early? You get this money back (minus fees).

• Policy Loans

  • Borrow against cash value (low interest, no credit check).

• Non-Forfeiture Options

  • If you stop paying:

    • Use cash value to keep coverage (at a reduced amount).

    • Or take a lump-sum payout.

    • Paid-Up Insurance

• Stop paying but keep a smaller death benefit (no more premiums).

1. Basic Functions: When is the Payout Triggered?

Type	Payout Timing	Best For
Term Life	Only if death occurs within a set period (e.g., 10, 20, 30 years).	Temporary needs (e.g., mortgages, income replacement).
Whole Life	Pays on death at any time (lifelong coverage).	Lifelong protection + cash value savings.
Endowment	Pays on a specific date (e.g., retirement) or earlier death.	Savings goals (e.g., educ

• Key Difference:

  • Term = Temporary (cheaper).

  • Whole/Endowment = Permanent (costs more but builds value).

2. Customizable Features ("Basic Variables")

A. Policy Flexibility

• Convertible: Switch from Term → Whole Life without a medical exam.

• Renewable: Extend Term Life coverage (usually at higher rates).

B. Profit Sharing

• Participating (Par): Earns dividends (from insurer’s profits).

• Non-Participating (Non-Par): Fixed premiums (no dividends).

C. Add-Ons ("Riders")

• Accidental Death: Extra payout for fatal accidents.

• Critical Illness: Lump sum if diagnosed with a covered disease.

• Waiver of Premium: Pauses premiums if disabled.

3. Two Critical Questions to Ask

• "What’s the Goal?"

  • Example:

  • "Protect my family while I pay off my mortgage" → Term Life.

  • "Leave an inheritance + grow savings" → Whole Life.

• "What’s Your Budget?"

  • Term = Low cost (e.g., $30/month for 20-year coverage).

  • Whole Life = Higher cost (e.g., $200/month) but builds cash value

Traditional Types of Life Insurance:

1. Term Insurance ("Renting" Coverage)

• What? Pays only if death happens within a set period (e.g., 10, 20, or 30 years).

• Best for: Temporary needs (e.g., covering a mortgage or kids’ education).
  
  

Sub-Types of Term Insurance:

Type	How It Works	Example Use
Level Term	Fixed payout (e.g., $500K for 20 years).	Income replacement.
Decreasing Term	Payout drops over time (e.g., matches a shrinking mortgage balance).	Paying off loans.
Increasing Term	Payout rises (e.g., to fight inflation).	Future cost protection.

Key Features:

• Renewable: Extend coverage (but premiums go up with age).

• Convertible: Swap for permanent insurance (no health check).

• Cheapest but expires with no value if you outlive the term.

2. Whole Life Insurance ("Buying" Coverage)

• What? Pays whenever you die (even at age 100+).

• Best for: Lifelong protection + cash savings.

• How Premiums Work:

  • Pay forever: "Straight life" (continuous premiums).

  • Pay for limited time: E.g., premiums until age 65.

  • Participating (Par): Earns dividends (like profit-sharing).

  • Bonus: Builds cash value (like a savings account) you can borrow against.

3. Endowment Insurance ("Savings + Insurance")

• What? Pays either on death OR at a set date (e.g., 20 years later).

• Best for: Goals like retirement or education funding.

• Example: Buy a 20-year endowment—if you die in year 10, your family gets the payout. If you live to year 20, you get the money.

• Catch: Higher premiums (since payout is guaranteed).

Non-Traditional Types of Life Insurance: 1. Universal Life Insurance ("Flexible Whole Life")

1. Universal Life Insurance ("Flexible Whole Life")

• What? A hybrid of life insurance + savings with adjustable premiums and death benefits.

Feature	How It Works	Why It Matters
Flexible Premiums	Pay more/less or skip payments (if cash value covers costs).	Adapts to your budget.
Adjustable Death Benefit	Increase/decrease coverage (may need a health check for increases).	Grow protection as needs change.
Transparent Pricing	Insurer breaks down costs: (1) Death risk, (2) Interest earned, (3) Fees.	No hidden charges.
Cash Value Growth	Extra premiums earn interest (after fees).	Acts like a savings account.
Death Benefit Options	Choose: (A) Face amount + cash value or (B) Face amount only.	Option A = Higher payout but slower cash growth.
Annual Reports	Details premiums, fees, cash value, and investment performance.	Full transparency.

• Best For: Those who want lifelong coverage but need flexibility in payments and coverage.

• Risk: Policy can lapse if cash value runs out and premiums aren’t paid.

Non-Traditional Types of Life Insurance: 2. Unit-Linked Insurance ("Investment-Linked")

• What? Combines life insurance + investments (e.g., stocks, bonds).

Feature	How It Works	Why It Matters
Linked to Investments	Premiums buy "units" in funds (e.g., stocks, bonds).	Value rises/falls with market.
Fund Choices	Pick funds (e.g., aggressive stocks or safe bonds).	Customize risk vs. reward.
Policy Types	Usually Whole Life or Endowment (sometimes with a minimum guaranteed payout).	Balances growth and safety.
No Guaranteed Returns	Cash value depends on market performance.	Higher potential returns but higher risk.

• Best For: Those comfortable with market risks who want life insurance + investment growth.

• Risk: Investments can lose value, reducing cash payouts.

Traditional vs. Non-Traditional

Type	Flexibility	Investment Component	Risk
Term/Whole Life	Fixed premiums/benefits.	Minimal (Whole Life has slow cash growth).	Low.
Universal Life	Adjustable premiums/benefits.	Moderate (cash value earns interest).	Medium (lapse risk).
Unit-Linked	Limited flexibility.	High (tied to markets).

When to Choose:

• Universal Life: "I want lifelong coverage but need to adjust payments."

• Unit-Linked: "I’m okay with market risks for higher investment returns."

1. What Are Annuities?

An annuity is a contract where you pay a lump sum or regular premiums to an insurer, and in return, you receive guaranteed income payments for life (or a fixed period).

Key Types of Annuities:

Type	How It Works	Best For
Immediate Annuity	Start receiving payments right after purchase (e.g., next month).	Retirees needing instant income.
Deferred Annuity	Pay premiums now, income starts later (e.g., at age 65).	Younger savers planning for retirement.
Life Annuity	Pays until death.	Lifelong income security.
Annuity Certain	Pays for a fixed period (e.g., 10 years), even if you die early.	Those who want to leave money to heirs.
Guaranteed Annuity	Pays for life + a minimum period (e.g., "10 years certain").	Balances lifetime income and inheritance.

2. What Are Pensions?

• A pension provides regular income after retirement (like an annuity). In Hong Kong:

  • Government: Civil servants get traditional pensions.

  • Private Sector: Most rely on the Mandatory Provident Fund (MPF)—a savings plan giving a lump sum at retirement.

Key Differences:

Annuity	Pension
Bought from insurers.	Often employer/government-provided.
Flexible payment options.	Usually fixed payouts (e.g., monthly income).
Can start anytime (deferred/immediate).	Typically starts at retirement age.

Why Choose an Annuity?

• Pros:

  • Guaranteed income for life (no market risk).

  • Tax benefits (for deferred annuities in HK).

• Cons:

  • Illiquid: Surrendering early may mean losses.

  • Inflation risk: Fixed payments lose value over time.

Why Choose a Pension (MPF)?

• Pros:

  • Employer contributions (free money!).

  • Invested in funds (potential growth).

• Cons:

  • Lump sum payout (no guaranteed lifetime income).

  • Market risk: Investments can lose value

1. Individual Insurance Plans

• What? Covers one person (you or someone you insure).

• Key Features:

  • Personalized underwriting (health checks, medical exams).

  • You pay premiums directly.

  • Policies are portable (keep coverage if you change jobs).

• Best For: People who want customized coverage (e.g., higher death benefits, cash value growth).

2. Group Insurance Plans

• What? Covers many people under one policy (e.g., employees of a company).

• Key Features:

Feature	How It Works
Master Policy	Employer/organization holds the contract.
Eligibility	Based on employment/membership (must be "actively at work").
Cost	Usually cheaper (bulk discounts + minimal underwriting).
Contributions	Non-contributory: Employer pays all. Contributory: You pay part.
Coverage Ends	If you leave the job/group (but some plans let you convert to an individual policy).

Types of Groups Covered:

• Single employers (most common).

• Associations (clubs, unions).

• Multiple employers (e.g., small businesses pooling together).

Pros:

• Low/no medical checks.

• Often includes extras (e.g., disability, critical illness riders).

Cons:

• Limited coverage (often 1–2x salary).

• Not portable (lose it if you quit).

Key Differences

Aspect	Individual Plan	Group Plan
Underwriting	Strict (medical exams).	Minimal (no exams).
Cost	Higher premiums.	Lower (employer subsidies).
Flexibility	Customizable benefits.	Standardized benefits.
Portability	Stays with you.	Ends if you leave the group.

1. What Are Riders?

Riders are add-ons to life insurance policies that expand or limit coverage. Two common disability-related riders are:

2. Disability Waiver of Premium (WP Rider)

• What it does:

  • If you become totally disabled, the insurer waives your premiums but keeps your policy active.

• Your coverage (and cash value, if any) continues growing as if you paid premiums.

Rider Rules

Feature	Details
Definition of Disability	Can’t work any job suited to your skills/experience OR lose sight/both limbs.
Waiting Period	Must be disabled for 3–6 months before waivers start.
Age Limit	Usually only covers disabilities starting between ages 15–65.
Exclusions	No coverage for self-harm, crimes, war injuries, or pre-existing conditions.

3. Disability Income Rider

• What it does:

  • Pays you a monthly income if you’re totally disabled.

  • Does not replace the death benefit (your family gets both if you die while disabled).

Feature	Details
Payout Options	% of your salary (e.g., 60%) or fixed amount (e.g., $5,000/month).
Waiting Period	1–6 months (like WP rider).
Same Exclusions	Self-harm, crimes, etc. (same as WP).

• Example:

  • You suffer a stroke and can’t work → After a 3-month wait, you receive $3,000/month until recovery (or for life, if permanent).

Key Differences

Waiver of Premium	Disability Income
Covers premium payments.	Provides cash income.
Keeps policy active.	Extra money for living expenses.
No payout beyond waived premiums.	Monthly payments during disability.

Who Needs These Riders?

• WP Rider: Best if you worry about affording premiums if disabled.

• Disability Income: Best if you lack other income sources (e.g., sick leave/employer benefits).

Accident Benefits:

• Life insurance policies often let you add accident protection through riders. Here’s how they work:

1. Accidental Death & Dismemberment (AD&D) Rider

• What it does: Pays extra money if you die or lose limbs/sight in an accident.

• Key Coverage:

Scenario	Payout (Example for a $500K Policy)
Accidental Death	+$500K (on top of base policy payout)
Lose 2 Limbs or Both Eyes	$500K (full AD&D benefit)
Lose 1 Limb or 1 Eye	$250K (50% of AD&D benefit)

Rules to Know:

• Accident Definition: Death/injury must happen within 1 year of the accident.

• Exclusions: No payout for:

• Suicide or self-harm.

• War, crime, or extreme sports.

• Aviation (unless you’re a passenger).

2. Other Common Accident Riders

• Some policies include additional accident benefits, like:

enefit	What It Covers	Example Payout
Serious Burns	3rd-degree burns	$50K lump sum
Weekly Disability	Income if you can’t work	$1K/week (max 52 weeks)
Hospital Stays	Daily cash for hospitalization	$200/day (max 1,000 days)
Double Indemnity	Extra payout for accidents on public transit/in public spaces	2x normal benefit

Accelerated Death Benefits:

Accelerated death benefits let you access part of your life insurance payout early if you face a serious illness or need long-term care. Here’s how they work:

1. Critical Illness Benefit

• What it does:

  • Pays a lump sum (e.g., 50–100% of your death benefit) if you’re diagnosed with a serious illness (like cancer, heart disease, or stroke) or have less than 12 months to live.

Key Rules:

Feature	Details
Covered Illnesses	Cancer, heart attacks, organ failure, ALS, etc. (varies by insurer).
Payout	Lump sum (e.g., $100K for a $200K policy).
Waiting Period	Usually 90 days after buying the rider.
Age Limit	Often stops at age 80.
Premium Waiver	Some insurers stop charging premiums after payout.

Example:

• You’re diagnosed with late-stage cancer → Insurer pays $150K of your $300K policy upfront for treatment.

2. Long-Term Care (LTC) Benefit

• What it does:

  • Pays monthly cash (e.g., 1–2% of your death benefit) if you need nursing home care or home healthcare due to chronic illness/disability.

Key Rules:

Feature	Details
Qualification	Must struggle with basic daily activities (e.g., bathing, dressing) OR need nursing care.
Payout	1% (home care) or 2% (nursing home) of death benefit/month. Max: 50–100% of total benefit.
Waiting Period	90 days of care required before payments start.
Premium Waiver	Often waived while receiving LTC benefits.

Key Differences

Critical Illness	Long-Term Care
Lump sum for diagnoses.	Monthly payments for care needs.
Covers specific diseases.	Covers chronic disability.
No repayment required.	Reduces future death benefit.

Pros & Cons

•  Pros:

  • Financial help when you need it most.

  • No need to wait until death for benefits.

• Cons:

  • Reduces payout to beneficiaries.

  • Strict eligibility rules (e.g., doctor’s approval).

Medical Benefits:

What It Is:

• Medical coverage can now be added to life insurance policies (either as a rider/add-on or as a separate policy)

• Covers hospitalization and medical treatment costs

Basic Coverage Includes:

• Hospital stays (choice of private/semi-private/ward rooms)

• Surgery costs (surgeon, anesthesiologist, operating room)

• Doctor fees (both for hospital stays and follow-up visits)

• Nursing care (at home or in hospital)

• Emergency services worldwide (including medical evacuation)

Upgrade Options:

• Can pay extra for higher coverage limits

• More comprehensive benefits available at additional cost

What's NOT Covered:

• Health problems you had before getting the insurance

• Pregnancy and childbirth costs

• Drug/alcohol related treatments

• Self-harm injuries

• HIV/AIDS (usually excluded for first 5 years)

• Birth defects

Key Things to Know:

• These benefits blur the line between life and health insurance

• Insurers must be properly licensed to offer medical coverage

• You can choose different coverage levels based on your budget

• There are always some exclusions (like pre-existing conditions)

1. What is VHIS?

• A government-regulated private health insurance program launched in 2019 that:

  • Standardizes quality hospital insurance plans

  • Gives tax benefits for buying certified plans

  • Helps people access private healthcare services

Key Benefits:

Feature	Details
Tax Deduction	Up to HK$8,000/year per person (you + eligible family members)
Plan Types	- Standard Plan: Basic coverage - Flexi Plan: Extra benefits
Coverage	Hospital/surgical expenses in private healthcare
Guarantees	No rejection for pre-existing conditions after 3 years

Who Can Join?

• Individuals: Any Hong Kong resident can voluntarily enroll

• Families: Covers spouse, children, parents, grandparents, siblings

• Example: A family of 4 can claim up to HK$32,000 in tax deductions (4 × HK$8,000)

4. Plan Comparison

	Standard Plan	Flexi Plan
Cost	Lower premium	Higher premium
Coverage	Basic benefits only	Extra benefits + basic coverage
Flexibility	Fixed terms	Customizable options

5. Important Rules

• Certification Required: All plans must be government-approved

• No Group Plans: Only individual policies qualify

• Transparency: Insurers must clearly explain benefits and exclusions

• Cooling-off Period: Right to cancel within short time after purchase

6. What's NOT Covered?

• Routine outpatient care

• Pre-existing conditions (first 3 years)

• Experimental treatments

• Cosmetic procedures

• Why Consider VHIS?

• Get faster access to private hospitals

• Reduce tax burden

• Standardized protection with government oversight

VHS Code of Practice:

 What is the Code of Practice?

• A rulebook for insurers selling VHIS plans that ensures:

  • Transparency: Clear plan information

  • Fairness: No misleading sales tactics

  • Consumer Protection: Right to cancel and full disclosure

2. Key Rules for Insurers:

Rule	What It Means	Why It Matters
1. Clear Marketing	Must explain plans in simple Chinese/English	Prevents confusion about coverage
2. No Misleading Info	All ads/materials must be accurate	Stops false promises
3. Highlight VHIS Benefits	Clearly show what’s covered under VHIS vs. non-VHIS plans	Easy comparison for buyers
4. Full Disclosure	Explain premiums, coverage limits, and exclusions upfront	No hidden surprises
5. Easy Access to Info	Provide websites/hotlines for questions	Quick help for consumers
6. Honesty in Applications	Warn applicants about penalties for lying on forms	Reduces fraud
7. Refund Clarity	Explain any fees if you cancel early	Know costs before signing up
8. Cooling-Off Period	Must mention your right to cancel (usually 21 days)	Buyers can change their minds
9. Global Coverage	Standard Plans work worldwide (except mental health)	Good for travelers
10. Doctor Choices	Standard Plans let you pick any doctor; Flexi Plans may restrict	Flexibility vs. cost savings
11. Room Upgrades	Standard Plans cover all rooms; Flexi may limit choices	Understand payout differences
12. Cost-Sharing	Explain if you’ll pay part of tests (e.g., 20% coinsurance)	Budget for out-of-pocket costs
13. Tax Benefits	Must remind buyers about HK$8,000/year deductions	Maximize savings

3. Special Notes

• Standard Plans: Full coverage for any hospital/doctor worldwide (except psychiatric care).

• Flexi Plans: May have restrictions (e.g., specific hospitals/rooms) but must still match Standard Plan basics.

• IA Guideline (GL31): Extra rules to ensure fair treatment across all medical insurance.

• Example:

• If you buy a Flexi Plan, the insurer must clearly say:

• "You can only claim 80% for MRI scans at Hospital X, but all other benefits match the Standard Plan."

Core Features of VHIS:

• Who Can Join?

  • Hong Kong residents (including HK ID card holders)

  • Age range: 15 days old to 80 years old

• Two Plan Types:

  • Standard Plan: Basic coverage meeting government minimum requirements

  • Flexi Plan: Enhanced coverage (higher benefits/more choices) while keeping all Standard Plan benefits

• Pricing & Transparency:

  • Insurers set their own prices based on age/gender

  • Must publicly disclose age-based premium schedules

  • Annual premium adjustments allowed for medical inflation

• Underwriting Rules:

  • Insurers can reject applications or add special terms

  • Must explain underwriting decisions in writing if requested

• Coverage Scope:

  • Works in both public and private hospitals

  • Doesn't affect your right to use public healthcare

•  Includes special benefits like:

  • Day surgery procedures

  • Advanced scans (CT/MRI/PET) with 30% co-payment

  • Cancer treatments (chemotherapy, radiotherapy)

  • Psychiatric inpatient care in HK

• Special Protections:

  • Guaranteed renewal until age 100

  • No lifetime benefit caps

  • 21-day cooling-off period (full refund if no claims)

• Pre-existing conditions:

  • Unknown conditions covered after 3 years (partial coverage years 2-3)

  • Congenital conditions (diagnosed after age 8) covered same as pre-existing

• Migration Option:

  • Existing policyholders can switch to VHIS plans

  • Insurers must offer this option

Key Advantages Over Regular Insurance:

• Standardized benefits for easy comparison

• Better coverage for pre-existing conditions over time

• Protection against sudden premium hikes for health changes

• Continued coverage into old age

Guideline on Medical Insurance Business (GL31):

1. Purpose of GL31

• The Insurance Authority (IA) created these rules to ensure fair treatment of customers in medical insurance. It applies to:

  • All insurers offering medical insurance

  • All insurance agents/brokers selling these products

• Key Principles (based on international standards):

  • Products must meet real customer needs

  • Clear, honest information before/during/after sale

  • Avoid inappropriate sales

  • Professional advice standards

  • Fair claims/complaints handling

  • Protect customer privacy

2. What GL31 Requires

A. Product Design Standards

• Insurers must:

  • Design products that actually help customers

  • Price products fairly and sustainably

  • Choose appropriate sales channels

  • Review products before launch (checking laws, risks, etc.)

B. Sales Process Rules

• Companies must:

  • Monitor sales practices continuously

  • Fix any unfair practices found

• Ensure:

  • No misleading information

  • Products match customer needs

  • Proper disclosure of terms

  • Ethical sales behavior

3. Enforcement

• Not legally binding, but...

• IA considers compliance when assessing:

  • Insurer fitness to operate

  • Agent/broker licensing

  • Potential penalties for unfair practices

• Example: If an insurer hides important exclusions in small print, the IA may investigate even though GL31 isn't a law.

4. Special Notes

• Applies to all medical insurance (individual/group/VHIS)

• Complements VHIS rules but is broader

• Based on global insurance standards (ICP 19)

Insurability Benefits: 1. Guaranteed Insurability Benefit (GI)

1. Guaranteed Insurability Benefit (GI)

• What it does: Lets you buy more coverage later without new medical checks.

• Key features:

  • Purchase triggers:

  • Specific dates/ages (e.g., every 3 years until age 40)

  • Life events (marriage, childbirth)

• Limits:

  • Usually capped at original policy amount

  • Must use within set time (typically 30-60 days after trigger)

• Special cases:

  • If disabled when eligible, coverage may be added automatically

  • Some policies include temporary coverage during option periods

• Example: You buy $500K policy at age 30 with GI rider. At age 35 (a trigger date), you can add another $500K without health questions.

Insurability Benefits: 2. Inflation Protection (COLA)

• What it does: Automatically increases disability payments to match inflation.

• How it works:

  • Tied to official inflation indexes (e.g., Consumer Price Index)

  • Typically adjusts annually

• Protects against loss of purchasing power for long-term claims

• Example: If your $5,000/month disability payment started in 2020, by 2030 it might automatically grow to $6,200/month based on inflation.

Why These Matter:

• GI Benefit: Safeguards future insurability if health declines

• COLA: Ensures disability payments keep their real value

• Both address critical long-term insurance risks

1. Entire Contract Provision

• What it means: The complete legal agreement consists of:

  • The policy document itself

  • Any attached riders (add-ons)

  • A copy of your original application

Key protections:

• Only top company officials can modify the contract

• All changes require written agreement from both parties

• You must keep the original policy document to make claims

• Why it matters: This prevents insurers from making unilateral changes and ensures all terms are documented.

2. Incontestability Provision

• How it works:

  • After 2 years of active coverage, insurers cannot challenge the policy's validity

• Exceptions:

  • Fraud (e.g., intentional lies on application)

  • Illegal contracts (e.g., no insurable interest)

  • Death during contestability period (if policy worded strictly)

• Hong Kong specifics:

  • Follows U.S.-style insurance contracts

  • Fraud always voids protection - courts won't enforce fraudulent claims

  • UK "indisputable clauses" may differ slightly in interpretation

• Example: If you forgot to disclose mild asthma when applying but the policy has been active for 2+ years, the insurer must still pay claims (unless they prove intentional fraud).

Grace Period:

• What it is: A safety net for late premium payments (typically 30-31 days after due date).

• Key Rules:

  • Coverage continues during grace period

  • No penalty for late payment if made within grace period

  • Doesn't apply to first premium

  • Not free coverage - unpaid premium will be deducted from death claims

• What happens if…

  • You pay within grace period → Policy continues normally

  • You don't pay → Policy lapses (immediately for UK-style, at grace period end for US-style)

  • Death occurs during grace period → Insurer pays death benefit minus unpaid premium

Beneficiary Designation

• Types of Beneficiaries:

  • Primary: First in line to receive death benefit

  • Contingent: Receives payout if primary beneficiary dies first

  • Revocable: Can be changed by policyowner

  • Irrevocable: Requires beneficiary's consent to change

• Special Cases:

• • Class designation: "My children" instead of naming individuals

  • Spouse/children beneficiaries: Creates automatic legal trust in Hong Kong under Married Persons' Status Ordinance

    • These become permanent gifts that can't be revoked

    • Survives even if beneficiary dies before insured

Potential Issues:

• Conflicting claims between beneficiaries, trustees, or creditors

• Insurers must verify proper beneficiary before paying out

• Equity law may override policy terms in some cases

Nonforfeiture Benefits

• When a policyholder stops paying premiums, nonforfeiture benefits prevent the policy from being completely lost by offering alternatives:

  • Automatic Premium Loan (APL) (if applicable)

  • If premiums are unpaid, the insurer may use the policy’s cash value to cover premiums, keeping the policy active until the cash value is exhausted.

  • (Some insurers treat APL as separate from nonforfeiture benefits.)

• Options if Policyholder Actively Stops Paying Premiums

• Cash Surrender Value: The insurer pays the remaining cash value, and the policy terminates.

• Reduced Paid-Up Insurance: The cash value buys a smaller, fully paid-up policy (no further premiums needed).

• Extended Term Insurance: The cash value converts the policy into term insurance for the same death benefit but for a limited period.

• If no option is chosen, the insurer may automatically apply Extended Term Insurance (unless APL is in effect).

Policy Loan

• Policyholders can borrow against the cash value:

  • Loan Amount: Up to the cash value (minus 1 year’s interest).

  • No collateral needed (the policy itself is security).

  • Flexible repayment: No fixed schedule, but unpaid interest is added to the loan.

  • Impact on Benefits: Outstanding loans (with interest) are deducted from death benefits or surrender value.

Reinstatement (Policy Revival)

• If a policy lapses (but isn’t surrendered), the policyholder may reinstate it within a set time (e.g., 5 years) by meeting conditions like:

  • Proving good health (insurability).

  • Repaying outstanding loans + interest.

  • Paying back premiums + interest.

  • Paying a reinstatement fee.

  • New contestability and suicide exclusion periods may apply.

• (Note: Reinstatement is not guaranteed and depends on insurer approval.)

Misstatement of Age or Sex

• If the insured’s age or sex was incorrectly reported:

  • After a Claim

    • The benefit is adjusted to reflect the correct age/sex (e.g., if premiums were too low, the payout is reduced).

    • (In the UK, adjustments are typically downward only—overpaid premiums may be refunded without increasing benefits.)

  • Before a Claim

    • The policyholder can:

    • Adjust the death benefit to match the correct premium.

    • Pay/Receive a premium difference to keep the same benefit.

    • (UK practice aligns with this, but specifics may vary by insurer.)

 Assignment

• An assignment transfers ownership rights of a life insurance policy to another party (the assignee). Key points:

1. Legal Basis

• Under the Law Amendment and Reform (Consolidation) Ordinance, a life insurance policy is a "chose in action" (a legal right to future benefits).

• Assignments can be for contractual purposes (e.g., securing a loan) or as a gift.

2. Key Features of Assignment

• Notice Requirement: The assignment is only binding on the insurer once written notice is received.

• Validity: The insurer does not verify the legality of the assignment—policyholders should seek legal advice.

• Rights of the Assignee:

  • Inherits all policy rights (e.g., death benefit, cash value).

  • But cannot claim more than the assignor could (e.g., if the policy was obtained fraudulently, the insurer can deny the claim).

  • Any outstanding loans or premiums will be deducted before the assignee receives proceeds.

  • Assignment ≠ Transfer of Obligations:

  • The assignee does not take over premium payments unless agreed separately.

• Limitations:

  • Cannot violate irrevocable beneficiary rights.

  • Cannot be used for illegal purposes (e.g., money laundering).

  • May be restricted to lump-sum payouts only (no installment options).

3. Types of Assignment

• Absolute Assignment:

  • Permanent transfer of all policy rights (e.g., gifting a policy).

• Collateral Assignment:

  • Temporary transfer (e.g., using the policy as loan collateral).

  • The assignee’s rights are limited to the loan amount + interest.

  • The assignor cannot surrender the policy or take loans while the assignment is active.

Dividend Options (For Participating/With-Profit Policies)

• Policyholders of participating policies (which pay dividends) can choose how to use them:

  • Cash Payment – Receive dividends immediately.

  • Premium Reduction – Use dividends to offset future premiums.

  • Accumulate with Interest – Leave dividends with the insurer to grow.

  • Buy Paid-Up Additional Insurance – Increases death benefit permanently.

  • Purchase Term Insurance – Uses dividends to buy 1-year term coverage.

• If no option is selected, insurers usually default to option 3 (accumulate with interest) or option 4 (buy additional insurance).

4.11 Settlement Options (How Benefits Are Paid Out)

• When a claim is made (e.g., death or maturity), beneficiaries/policyowners can choose:

  • Lump Sum – Full payout in one payment.

  • Interest Option – Insurer holds proceeds and pays interest periodically.

  • Fixed Period Option – Installments over a set time (e.g., 10 years).

  • Fixed Amount Option – Fixed payments until proceeds + interest run out.

  • Life Income (Annuity) – Guaranteed income for life (smaller payments but lifelong).

4.12 Suicide Exclusion

• General Rule: Suicide is excluded for the first 1–2 years of the policy.

• If suicide occurs during exclusion period:

  • No death benefit paid, but premiums (minus loans) are refunded.

• If suicide occurs after exclusion period:

  • Full death benefit is paid.

• Exceptions:

  • Insurers may pay ex gratia (voluntarily) if suicide was unrelated to policy inception (e.g., due to mental illness post-purchase).

  • Suicide is no longer a crime, but insurers retain this clause to prevent fraud.

Key Takeaways

• Assignment allows policy ownership transfer (permanent or as collateral).

• Dividends can be taken as cash, used to reduce premiums, or buy more coverage.

• Settlement options let beneficiaries receive payouts flexibly (lump sum, installments, or annuity).

• Suicide exclusion protects insurers from fraud but allows claims after a waiting period.