Financial Management and Insurance Planning
This domain tests how you convert a household's financial data into a funded risk-management plan. Expect cash-flow analysis, ratio interpretation, insurance needs, policy features, and Hong Kong conduct rules.
Financial statements and ratios
- A net worth statement shows assets minus liabilities at a point in time. A cash-flow statement shows income minus outflows over a period. Do not mix the two.
- Monitor the savings ratio, emergency fund (3–6 months of essential outgoings), debt-to-asset ratio, housing-cost ratio, and liquidity ratio.
- Emergency reserves belong in cash or short-term deposits, not in ILAS products, long-term endowments, or locked MPF balances.
Risk management and insurance
- Treat risk by avoiding, reducing, retaining, or transferring it. Insurance transfers pure risk; it does not eliminate investment risk.
- Core principles include insurable interest, utmost good faith, indemnity, proximate cause, subrogation, and contribution. Life and personal accident policies are benefit policies; property and liability policies are indemnity policies.
- In Hong Kong, the Insurance Authority licenses intermediaries; the SFC authorises collective investment schemes, including ILAS; the Policyholders' Protection Scheme covers eligible claims. Motor third-party liability and Employees' Compensation Insurance are compulsory in relevant cases.
- Life products include term, whole life, endowment, universal life, and ILAS. Read exclusions, waiting periods, deductibles, coinsurance, non-disclosure consequences, and premium loadings.
Worked example. A couple earns HK$60,000 monthly, spends HK$45,000, holds HK$150,000 cash, and has assets of HK$3.0m and liabilities of HK$1.2m. A six-month emergency target is HK$270,000, so the shortfall is HK$120,000. Net worth is HK$1.8m. If the main earner dies, ten years of income replacement at HK$45,000 monthly is HK$5.4m; add debts of HK$1.2m and education costs of HK$1.0m, then subtract liquid assets of HK$0.15m and existing cover of HK$2.0m. The additional cover needed is HK$4.45m. The reasoning is to fund the household's actual gap, not a round-number sum.
Traps that cost marks: calling MPF an emergency fund; treating an ILAS as a deposit; ignoring policy exclusions; using insurance to solve an investment need; forgetting that indemnity policies cannot profit the insured; and missing disclosure duties.