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NZ Level 5 Life, Disability and Health Insurance study materials
NZ Level 5 Life, Disability and Health Insurance study resources

NZ Level 5 Life, Disability and Health Insurance practice questions

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Question 1Regulatory and ethical framework for life, disability and health insurance

Under the Financial Markets Conduct Act 2013, which activity requires a person to hold a financial advice provider (FAP) licence when advising on life insurance products?

  1. Discussing the weather with a neighbour who mentions insurance
  2. Reading an insurer's product brochure for personal interest
  3. Attending a seminar hosted by an insurer without advising anyone
  4. Giving regulated financial advice to retail clients as a business Correct answer.

Explanation

Providing regulated financial advice to retail clients in the course of business requires a financial advice provider licence under the Financial Markets Conduct Act 2013. Personal, non-business activity and simply receiving information do not trigger the licensing requirement. The licence obligation attaches to the provider entity that engages advisers.

Question 2Regulatory and ethical framework for life, disability and health insurance

A financial adviser recommends a trauma cover policy to a client. Under the code of conduct standards, which duty applies most directly to that recommendation?

  1. Giving advice that is suitable for the client's circumstances Correct answer.
  2. Maximising the commission earned on the placement
  3. Deferring the decision entirely to the client's family
  4. Recommending the cheapest product available in the market

Explanation

The code of conduct requires advisers to ensure advice is suitable for the client, taking account of their circumstances, goals and needs. Commission maximisation is a conflict of interest, not a duty. Price alone is not the suitability test, and family members cannot substitute for the client's own decision.

Question 3Regulatory and ethical framework for life, disability and health insurance

Which statement best describes the purpose of the Financial Services Legislation Amendment Act 2019 reforms for life insurance advice?

  1. It transferred insurance supervision to the Reserve Bank
  2. It replaced the individual adviser authorisation model with a provider licensing regime Correct answer.
  3. It banned all commissions on life insurance products
  4. It removed the requirement to disclose conflicts of interest

Explanation

The 2019 reforms introduced the financial advice provider licensing regime, shifting from individual authorisation to provider-level licensing with engaged advisers. Commissions were not banned, and conflict disclosure obligations were strengthened rather than removed. Insurance conduct supervision sits with the FMA, not the Reserve Bank.

Question 4Regulatory and ethical framework for life, disability and health insurance

An adviser receives a higher commission for placing a client's cover with Insurer A than Insurer B. What is the most appropriate ethical response?

  1. Avoid disclosing the commission to keep the advice simple
  2. Recommend Insurer A because higher commission signals better quality
  3. Recommend Insurer A without mentioning the commission difference
  4. Disclose the conflict to the client and recommend the product that best suits their needs Correct answer.

Explanation

Where a conflict of interest exists, the adviser must prioritise the client's interests and disclose the conflict so the client can make an informed decision. A higher commission is not evidence of product quality. Concealing the incentive breaches both ethical duties and disclosure obligations.

Question 5Regulatory and ethical framework for life, disability and health insurance

A client discloses that they have a family history of Huntington's disease when applying for life cover. Under New Zealand law, how may the insurer use this genetic information?

  1. It may use the information in underwriting if it is relevant and actuarially justified Correct answer.
  2. It may only use the information if the client signs a waiver
  3. It must report the client to the regulator for withholding data
  4. It must ignore all genetic information regardless of relevance

Explanation

New Zealand permits insurers to use genetic test information in underwriting where it is relevant and supported by actuarial evidence, subject to human rights and privacy law constraints. There is no blanket prohibition, and a waiver is not the mechanism that authorises use. Reporting the client to the regulator has no basis here.

Question 6Regulatory and ethical framework for life, disability and health insurance

Which legislation primarily governs how an insurer may collect, use and disclose personal health information from an applicant?

  1. Financial Markets Conduct Act 2013
  2. Privacy Act 2020 Correct answer.
  3. Fair Trading Act 1986
  4. Companies Act 1993

Explanation

The Privacy Act 2020 sets the information privacy principles governing collection, use, storage and disclosure of personal information, including health information. The Fair Trading Act addresses misleading conduct, the Companies Act governs corporate entities, and the FMCA governs financial products and advice.

Question 7Regulatory and ethical framework for life, disability and health insurance

An adviser is completing a client's application for health insurance. The client asks whether they must disclose a previous knee surgery that happened five years ago. What is the correct advice?

  1. Omit it if the client believes it has fully healed
  2. Disclose it only if the insurer specifically asks about knees
  3. Disclose it, because material medical history must be answered truthfully Correct answer.
  4. Omit it, because five years have passed and it is irrelevant

Explanation

Applicants have a duty to disclose material medical information truthfully when answering underwriting questions, and past surgery can be material to risk assessment. Time elapsed does not automatically make a condition immaterial. Personal belief about recovery is not a substitute for disclosure.

Question 8Regulatory and ethical framework for life, disability and health insurance

Which body is responsible for investigating complaints about an insurer's handling of a life insurance claim in New Zealand?

  1. Financial Services Complaints Limited or the Insurance and Financial Services Ombudsman Correct answer.
  2. The Ministry of Business, Innovation and Employment
  3. The Commerce Commission
  4. The Reserve Bank of New Zealand

Explanation

Approved dispute resolution schemes such as Financial Services Complaints Limited and the Insurance and Financial Services Ombudsman handle complaints about insurers and financial service providers. The Reserve Bank supervises prudential soundness, the Commerce Commission enforces fair trading and competition law, and MBIE advises on policy.

Question 9Regulatory and ethical framework for life, disability and health insurance

An insurer discovers during a claim that the applicant failed to disclose a diagnosed heart condition at application. What is the most likely regulatory and contractual consequence?

  1. The insurer must refer the matter to the police for prosecution
  2. The insurer must automatically refund all premiums with interest
  3. The insurer must pay the claim in full regardless of disclosure
  4. The insurer may avoid the policy or decline the claim for non-disclosure Correct answer.

Explanation

Non-disclosure of a material condition entitles the insurer to remedies that may include avoiding the contract or declining the claim, depending on the policy terms and the nature of the non-disclosure. Full payment is not required where material non-disclosure is established. Police referral and automatic refunds are not standard consequences.

Question 10Regulatory and ethical framework for life, disability and health insurance

Which principle under the Human Rights Act 1993 is most relevant to an insurer's ability to decline cover based on a person's disability?

  1. The right to freedom of expression
  2. The protection of property rights
  3. The prohibition on discrimination on grounds including disability, subject to statutory exceptions Correct answer.
  4. The presumption of innocence

Explanation

The Human Rights Act 1993 prohibits discrimination on grounds including disability, and insurance is subject to specific exceptions where differences are based on actuarial or statistical data. Freedom of expression, presumption of innocence and property rights are not the operative provisions for insurance underwriting.

Question 11Regulatory and ethical framework for life, disability and health insurance

Under the Fair Trading Act 1986, which conduct by an adviser is prohibited when describing a life insurance product?

  1. Explaining policy exclusions clearly to the client
  2. Making misleading statements about the scope of cover provided Correct answer.
  3. Providing a written comparison of two policies
  4. Advising the client to read the policy wording

Explanation

The Fair Trading Act 1986 prohibits misleading and deceptive conduct in trade, including misrepresenting the scope of cover. Clear explanation of exclusions, written comparisons and encouraging clients to read the wording are all appropriate practices.

Question 12Regulatory and ethical framework for life, disability and health insurance

A client wants to cancel a life policy within the free-look period. What right does the client generally have under New Zealand insurance practice?

  1. To cancel only if the insurer agrees in writing after one year
  2. To cancel only after the first claim is made
  3. To cancel within the cooling-off period and receive a refund of premiums paid Correct answer.
  4. To transfer the policy to a friend without insurer consent

Explanation

New Zealand life insurance policies typically provide a cooling-off or free-look period during which the policyholder may cancel and receive a refund of premiums. Cancellation is not tied to making a claim or to a one-year waiting period. Assignment to another person requires insurer consent and is a separate process.

Question 13Regulatory and ethical framework for life, disability and health insurance

Which of the following best describes the adviser's obligation when a client refuses to provide information needed to assess suitability?

  1. Decline to advise and refuse to communicate with the client
  2. Proceed as if the information had been provided
  3. Advise the client to obtain the missing information from social media
  4. Document the limitation and explain the consequences for the advice given Correct answer.

Explanation

Where a client withholds information, the adviser should record the limitation and explain how it affects the advice, so the client understands the reduced basis for the recommendation. Assuming information or fabricating a basis is improper. Refusing all communication is unnecessary, and social media is not a reliable source for suitability information.

Question 14Regulatory and ethical framework for life, disability and health insurance

An adviser recommends cancelling an existing trauma policy and replacing it with a new one. Which disclosure is most relevant to managing the replacement risk?

  1. The number of other clients the adviser has
  2. The adviser's holiday plans for the coming year
  3. The costs and loss of benefits from replacing existing cover Correct answer.
  4. The name of the insurer's chief executive

Explanation

Replacement of insurance carries risks such as new waiting periods, exclusions and loss of accrued benefits, and these must be disclosed so the client can make an informed choice. Personal details of the adviser and insurer are irrelevant to the replacement decision.

Question 15Regulatory and ethical framework for life, disability and health insurance

Which statement about the role of the Financial Markets Authority (FMA) in relation to life insurance conduct is correct?

  1. It sets the premium rates that insurers must charge
  2. It approves every individual life policy before sale
  3. It monitors and enforces compliance with financial markets and conduct obligations Correct answer.
  4. It acts as the insurer of last resort for failed insurers

Explanation

The FMA is the conduct regulator for financial markets and financial services, monitoring and enforcing compliance with obligations such as licensing and fair dealing. It does not set premiums, approve individual policies, or act as an insurer of last resort.

Question 16Regulatory and ethical framework for life, disability and health insurance

A client asks an adviser to recommend a health insurance product that excludes a pre-existing condition. What is the adviser's most appropriate action?

  1. Agree that the exclusion does not matter without discussion
  2. Explain the exclusion and assess whether the product still meets the client's needs Correct answer.
  3. Refuse to discuss exclusions because they are technical
  4. Recommend the product and omit the exclusion from the advice record

Explanation

The adviser must explain material policy terms, including exclusions, and assess whether the product remains suitable given the client's needs. Dismissing the exclusion or omitting it from records undermines informed decision-making. Refusing to discuss technical terms is inconsistent with the duty to communicate clearly.

Question 17Regulatory and ethical framework for life, disability and health insurance

Which of the following is a key ethical requirement when an adviser handles a client's sensitive health information?

  1. Share it freely with other insurers for marketing
  2. Disclose it to the client's employer without consent
  3. Store it indefinitely in an unsecured file
  4. Collect only information necessary for the purpose and keep it secure Correct answer.

Explanation

Privacy principles require collecting only information necessary for a lawful purpose and protecting it with reasonable security. Sharing health information for marketing, storing it insecurely, or disclosing it to an employer without consent would breach those principles.

Question 18Regulatory and ethical framework for life, disability and health insurance

An adviser is unsure whether a product recommendation meets the suitability standard. What is the most appropriate course of action?

  1. Give the advice immediately and correct it later if challenged
  2. Rely on the client to identify any unsuitability
  3. Seek further information or escalate before giving the advice Correct answer.
  4. Recommend the product with the highest commission to be safe

Explanation

When uncertain about suitability, the adviser should gather further information or escalate within the provider before advising, consistent with the duty of care. Advising first and correcting later exposes the client to harm. Relying on the client or defaulting to commission-based choices is inconsistent with the adviser's professional obligations.

Question 19Regulatory and ethical framework for life, disability and health insurance

Which document typically sets out the scope of the advice a financial adviser will provide to a client?

  1. The adviser's employment contract with a previous employer
  2. The insurer's annual report
  3. The client's birth certificate
  4. The scope of service or engagement agreement Correct answer.

Explanation

A scope of service or engagement agreement defines what advice will and will not be provided, helping both parties understand the boundaries. Annual reports, birth certificates and old employment contracts do not define the advisory relationship.

Question 20Regulatory and ethical framework for life, disability and health insurance

A client with a terminal illness applies for life cover. How should the adviser balance the duty to the client with the insurer's underwriting requirements?

  1. Advise the client to delay treatment to improve the application
  2. Conceal the diagnosis to help the client obtain cover
  3. Submit the application without the client's knowledge
  4. Provide accurate information to the insurer and explain the likely underwriting outcome to the client Correct answer.

Explanation

The adviser must present accurate information to the insurer and honestly explain the likely underwriting outcome, including possible decline or loading. Concealing a diagnosis or manipulating treatment is fraudulent and harmful. Submitting an application without the client's knowledge breaches consent and agency duties.

Question 21Regulatory and ethical framework for life, disability and health insurance

Which of the following best describes the concept of 'treating customers fairly' in the context of life insurance?

  1. Delivering outcomes that meet reasonable customer expectations throughout the product lifecycle Correct answer.
  2. Applying the same recommendation to every client
  3. Maximising sales volumes regardless of client needs
  4. Reducing disclosure to speed up applications

Explanation

Treating customers fairly focuses on delivering outcomes consistent with reasonable customer expectations across design, sales, servicing and claims. Sales-volume targets, reduced disclosure and blanket recommendations all conflict with that principle.

Question 22Regulatory and ethical framework for life, disability and health insurance

An adviser's client is a small business owner seeking key person life cover. Which factor is most relevant to assessing suitability?

  1. The colour of the policy document cover
  2. The number of staff in the business's social club
  3. The financial impact of the key person's death on the business Correct answer.
  4. The adviser's personal preference for a particular insurer

Explanation

Key person cover is designed to protect a business against the financial loss arising from the death or disablement of a key individual, so the economic impact is central to suitability. Adviser preference, document appearance and social club membership are irrelevant to the risk assessment.

Question 23Regulatory and ethical framework for life, disability and health insurance

Which of the following is an example of an adviser breaching the duty to act in the client's interests?

  1. Explaining a policy's exclusions in writing
  2. Comparing two products against the client's goals
  3. Recommending a product that pays the adviser a higher commission but does not meet the client's needs Correct answer.
  4. Declining to recommend a product the client does not need

Explanation

The duty to act in the client's interests is breached when the adviser's remuneration influences a recommendation that does not meet the client's needs. Explaining exclusions, comparing products and declining unnecessary products are all consistent with that duty.

Question 24Regulatory and ethical framework for life, disability and health insurance

A client is unhappy with the outcome of a claim decision and wants to challenge it. What is the appropriate first step the adviser should explain?

  1. Publish the dispute on social media to pressure the insurer
  2. Immediately commence legal proceedings in the High Court
  3. Report the insurer to the Reserve Bank for prudential failure
  4. Use the insurer's internal complaints process, then an approved dispute resolution scheme if unresolved Correct answer.

Explanation

Complaints should first go through the insurer's internal complaints process, and if unresolved, the client may refer the matter to an approved dispute resolution scheme. High Court proceedings are not the standard first step, the Reserve Bank handles prudential matters, and public pressure campaigns are not a dispute resolution pathway.

Question 25Regulatory and ethical framework for life, disability and health insurance

Which statement best explains why an adviser must keep accurate client records of advice given?

  1. Records are the insurer's responsibility, not the adviser's
  2. Records provide evidence that the advice was suitable and obligations were met Correct answer.
  3. Records can be discarded once the policy is issued
  4. Records are only needed if the client complains within one month

Explanation

Accurate records evidence the basis of the advice, demonstrate compliance with suitability and disclosure obligations, and support the client relationship over time. They are not limited to a one-month complaint window, cannot be discarded after issue, and remain the adviser's responsibility.

Question 26Regulatory and ethical framework for life, disability and health insurance

Under the Financial Markets Conduct Act 2013, an insurer issuing a life policy must provide a disclosure document to a retail client before the policy is entered into. Which document fulfils this requirement for a life insurance product?

  1. The policy's claims history summary
  2. The adviser's personal disclosure statement
  3. The insurer's annual financial statements
  4. The product disclosure statement for the policy Correct answer.

Explanation

The Financial Markets Conduct Act 2013 requires issuers of financial products, including life insurance policies, to prepare a product disclosure statement that discloses key features, benefits, risks and costs. It must be given to retail clients before they enter into the policy. The adviser's own disclosure statement addresses adviser remuneration and conflicts, not the product itself.

Question 27Regulatory and ethical framework for life, disability and health insurance

An adviser is a member of a professional body and is advising a client on trauma cover. Which statement best describes how a code of professional conduct operates alongside the general law?

  1. The code only applies to advisers employed by insurers, not to independent advisers
  2. The code replaces the adviser's legal obligations, so compliance with the code is sufficient
  3. The code is enforceable only by the FMA and carries no professional consequences
  4. The code sets ethical and conduct standards that operate in addition to legal duties, and breach may attract professional discipline even where no law is broken Correct answer.

Explanation

A professional code imposes conduct and ethical standards that sit alongside statutory and common law duties rather than replacing them. An adviser can comply with the law yet still breach the code, for example through poor record-keeping or a conflict of interest. Professional bodies can discipline members for code breaches independently of any regulatory action.

Question 28Regulatory and ethical framework for life, disability and health insurance

An adviser meets a new client who wants income protection cover. During the fact-find the client mentions a recent stress-related illness but says they would rather not discuss it. How should the adviser proceed?

  1. Explain why the information matters, record the client's decision, and warn that non-disclosure may affect a future claim Correct answer.
  2. Refuse to act for the client and refer them to another adviser
  3. Disclose the illness to the insurer without the client's knowledge to protect the claim
  4. Complete the application omitting the illness because the client has the right to refuse

Explanation

The adviser must explain the duty of disclosure and the consequences of non-disclosure so the client can make an informed choice, then record what was said and decided. The client retains the right to withhold information, but the adviser should not conceal the risk from them. Disclosing without consent would breach privacy obligations.

Question 29Regulatory and ethical framework for life, disability and health insurance

An adviser recommends that a client replace an existing life policy with a new one that has a higher premium but broader cover. The existing policy has been in force for eight years and has no medical underwriting. Which factor is most important for the adviser to analyse before making the recommendation?

  1. Whether the existing insurer advertises more heavily than the new one
  2. Whether the client is likely to face new underwriting exclusions or loading on the replacement policy Correct answer.
  3. Whether the new insurer offers a loyalty discount after ten years
  4. Whether the adviser will receive a higher commission on the replacement policy

Explanation

Replacement advice must weigh the loss of existing benefits, including any grandfathered underwriting terms, against the advantages of the new policy. A client who has held cover without exclusions may face new exclusions or loadings on re-underwriting, which can outweigh broader cover. The adviser's own remuneration must never drive the recommendation.

Question 30Regulatory and ethical framework for life, disability and health insurance

A client complains that an insurer declined their disability claim, and the adviser believes the insurer misapplied the policy's definition of disability. The client wants to escalate the matter. Which sequence best reflects the appropriate dispute resolution pathway in New Zealand?

  1. Ask the adviser's professional body to overrule the insurer's claim decision
  2. Refer the matter directly to the High Court, because only a court can interpret policy wording
  3. Complain to the insurer's internal disputes process first, then refer the unresolved dispute to the independent dispute resolution scheme the insurer belongs to Correct answer.
  4. Refer the matter to the Commerce Commission, which adjudicates individual insurance claims

Explanation

Insurers must belong to an approved independent dispute resolution scheme, and clients are generally expected to use the insurer's internal complaints process before the scheme can consider the dispute. The scheme can make binding decisions on claims up to statutory limits. Courts and the Commerce Commission are not the first port of call for an individual claim dispute.

Question 31Life insurance products and policy structures

Under a level term life policy, which statement best describes the death benefit payable if the life insured dies on the last day of the policy term while all premiums are paid?

  1. No benefit is payable because term cover carries no surrender value.
  2. A reduced paid-up amount is payable based on premiums paid.
  3. The benefit is limited to a refund of premiums paid.
  4. The full sum insured is payable because cover remains in force until the expiry date. Correct answer.

Explanation

Level term cover remains fully in force for the whole term, so a death occurring before expiry triggers the full sum insured. The absence of a cash value is a separate feature and does not reduce the death benefit.

Question 32Life insurance products and policy structures

A whole of life policy differs from a term policy mainly because it:

  1. Has no premium and is funded entirely from investment returns.
  2. Pays a benefit only on accidental death.
  3. Provides cover for the whole of life and builds a surrender value. Correct answer.
  4. Pays only if death occurs within a fixed number of years.

Explanation

Whole of life cover has no expiry date and typically accumulates a cash or surrender value over time. Term cover, by contrast, expires at the end of a defined period and usually has no cash value.

Question 33Life insurance products and policy structures

An endowment policy matures at the end of its term. What is payable at maturity if the life insured is still alive?

  1. The sum insured is paid to the policyowner. Correct answer.
  2. Only the total premiums paid are refunded.
  3. The death benefit is paid to the estate.
  4. Nothing is paid; the policy simply lapses.

Explanation

An endowment policy pays the sum insured on survival to the maturity date, as well as on earlier death. This survival benefit is what distinguishes an endowment from pure whole of life cover.

Question 34Life insurance products and policy structures

In a life insurance policy, the person whose death triggers the claim is correctly called the:

  1. Life insured. Correct answer.
  2. Underwriter.
  3. Policyowner.
  4. Beneficiary.

Explanation

The life insured is the individual on whose life the cover is written. The policyowner holds the contract and the beneficiary receives the proceeds, but neither is necessarily the person whose death is insured.

Question 35Life insurance products and policy structures

A policyholder nominates their spouse as beneficiary but does not make the nomination irrevocable. Which statement is correct?

  1. The spouse's consent is required to change the nomination.
  2. The nomination automatically transfers ownership to the spouse.
  3. The policyowner may generally change the nomination without the spouse's consent. Correct answer.
  4. The nomination cannot be altered once the policy is issued.

Explanation

A revocable nomination can be changed by the policyowner at any time without consent from the nominated person. An irrevocable nomination, by contrast, restricts the owner's ability to redirect the benefit.

Question 36Life insurance products and policy structures

A policy contains a 14-day free look provision. What does this give the policyowner?

  1. A right to cancel the new policy within that period and receive a refund. Correct answer.
  2. A right to skip the first premium payment without penalty.
  3. A guarantee that premiums cannot rise for 14 days.
  4. A right to increase the sum insured without underwriting.

Explanation

The free look period lets a new policyowner reconsider the purchase and cancel within a set number of days, usually with premiums refunded. It is a consumer protection feature, not a premium waiver or underwriting concession.

Question 37Life insurance products and policy structures

Which of the following is a standard exclusion commonly found in New Zealand life insurance policies?

  1. Death resulting from suicide within a specified initial period. Correct answer.
  2. Death occurring while the policyowner is overseas on holiday.
  3. Death from an illness diagnosed after the policy commenced.
  4. Death from natural causes after the policy has been in force for many years.

Explanation

Many life policies limit or exclude cover for suicide occurring within an initial period, often around 13 weeks or 12 months. Death from natural causes or later-diagnosed illness during the term is ordinarily covered, and travel is not typically excluded.

Question 38Life insurance products and policy structures

A policyowner stops paying premiums on a whole of life policy that has accumulated a surrender value. Which option typically becomes available?

  1. Continuing full cover indefinitely without paying premiums.
  2. Automatic doubling of the sum insured.
  3. Converting to a reduced paid-up policy with a lower sum insured. Correct answer.
  4. Transferring the policy to the insurer's shareholders.

Explanation

Where a cash value exists, non-forfeiture options such as reduced paid-up cover or extended term cover may apply. These preserve some benefit but at a reduced level rather than maintaining full cover for free.

Question 39Life insurance products and policy structures

An adviser is comparing two term policies. Policy A has a sum insured of $500,000 for 20 years; Policy B has $500,000 for 10 years with a renewal option. Which feature of Policy B is most relevant to the client?

  1. Policy B guarantees the same premium at renewal.
  2. The renewal option may allow continued cover without fresh full underwriting. Correct answer.
  3. Policy B automatically converts to whole of life at year 10.
  4. Policy B will always have a lower total premium over 20 years.

Explanation

A renewal option can let the policyholder continue cover at the end of the term without full re-underwriting, which matters if health has changed. It does not guarantee premiums, and the total cost over 20 years depends on renewal rates.

Question 40Life insurance products and policy structures

A client wants life cover that will pay a benefit whenever death occurs, with premiums payable for life and a cash value building over time. Which product best matches this need?

  1. Whole of life policy. Correct answer.
  2. Endowment policy maturing at age 65.
  3. Accidental death policy.
  4. Level term policy.

Explanation

Whole of life cover has no expiry and pays whenever death occurs, with premiums typically payable for life and a surrender value accumulating. Endowment cover expires at maturity, and term and accidental policies do not meet the lifetime guarantee requirement.

Question 41Life insurance products and policy structures

A policyholder has a mortgage protection policy with a decreasing sum insured. Which statement best explains how the benefit behaves?

  1. The sum insured reduces only if the policyholder makes a claim.
  2. The sum insured increases each year with inflation.
  3. The sum insured stays level while the premium decreases.
  4. The sum insured reduces over time, broadly tracking the reducing loan balance. Correct answer.

Explanation

Decreasing term cover is designed so the benefit reduces in line with a repayment mortgage, keeping premiums lower than level cover for the same initial amount. The reduction happens automatically over the term regardless of claims.

Question 42Life insurance products and policy structures

A client is reviewing a policy with an inflation adjustment feature. What is the main purpose of this feature?

  1. To convert the policy to a term policy at renewal.
  2. To increase the sum insured periodically so the benefit keeps pace with the cost of living. Correct answer.
  3. To allow the insurer to cancel cover if inflation rises.
  4. To reduce premiums as the policyholder ages.

Explanation

Indexation adjusts the sum insured, and usually the premium, in line with an inflation measure so the real value of the benefit is maintained. It does not reduce premiums or alter the product type.

Question 43Life insurance products and policy structures

A life policy includes a waiver of premium benefit. When does this benefit typically operate?

  1. When the policyowner simply forgets to pay a premium.
  2. When the beneficiary dies before the life insured.
  3. When the life insured becomes totally disabled and cannot work for a defined period. Correct answer.
  4. When the sum insured is increased at renewal.

Explanation

Waiver of premium pays or waives premiums when the insured becomes disabled and meets the policy's definition, usually after a waiting period. It does not excuse non-payment for other reasons or respond to beneficiary events.

Question 44Life insurance products and policy structures

An applicant fails to disclose a known heart condition when applying for life cover. Two years later they die of an unrelated cause. What is the insurer's likely position?

  1. The insurer must pay because the death was unrelated to the condition.
  2. The insurer must pay because two years have passed.
  3. The insurer may only reduce the benefit by the extra premium owed.
  4. The insurer may avoid the policy if the non-disclosure was material, even if the death cause differs. Correct answer.

Explanation

Life insurance is a good faith contract, and material non-disclosure can allow the insurer to avoid the policy regardless of the cause of death. The relevance of the undisclosed condition to the actual death is not the determining factor.

Question 45Life insurance products and policy structures

A client wants cover for a specified list of serious illnesses with a lump sum paid on diagnosis. Which product are they describing?

  1. Trauma (critical illness) cover. Correct answer.
  2. Total and permanent disability cover.
  3. Income protection cover.
  4. Term life cover.

Explanation

Trauma or critical illness cover pays a lump sum when the insured is diagnosed with a condition on the policy's defined list. Term life pays on death, income protection replaces earnings, and TPD responds to permanent disability.

Question 46Life insurance products and policy structures

Which statement best distinguishes total and permanent disability (TPD) cover from income protection?

  1. TPD pays a lump sum on permanent disability, while income protection replaces earnings during disability. Correct answer.
  2. TPD requires a hospital stay, while income protection does not.
  3. Both products pay only on death.
  4. TPD pays a monthly benefit, while income protection pays a lump sum.

Explanation

TPD cover provides a lump sum once the insured meets a permanent disability definition, while income protection pays a monthly benefit, usually a percentage of earnings, during a period of disability. They address different financial needs.

Question 47Life insurance products and policy structures

A policyowner wants to add a child cover benefit to their life policy. What is the typical purpose of this rider?

  1. To transfer ownership of the policy to the child at age 18.
  2. To increase the parent's sum insured automatically.
  3. To waive the parent's premiums for any reason.
  4. To pay a limited benefit if a covered child dies or is diagnosed with a specified condition. Correct answer.

Explanation

Child cover riders provide a modest benefit on the death or specified illness of a covered child, without the need for separate policies. They do not change the parent's cover or transfer ownership.

Question 48Life insurance products and policy structures

A client is offered a policy with a premium loading following underwriting. What does the loading represent?

  1. A discount for paying annually.
  2. An additional premium reflecting a higher assessed risk. Correct answer.
  3. A fee for changing the beneficiary.
  4. A refund of overpaid premiums.

Explanation

A loading is an extra premium imposed when the insurer assesses the applicant as a higher-than-standard risk, for example due to health or occupation. It is distinct from discounts, fees, or refunds.

Question 49Life insurance products and policy structures

A life policy contains a standard 30-day grace period. What is the effect if the policyholder dies on day 20 after a missed premium?

  1. The claim is declined because the premium was late.
  2. Only the surrender value is paid.
  3. The policy is automatically cancelled on the due date.
  4. The claim is generally payable, with the outstanding premium deducted. Correct answer.

Explanation

The grace period keeps cover in force for a set time after a missed premium, so a valid claim during that period is paid. The insurer will typically deduct the unpaid premium from the benefit.

Question 50Life insurance products and policy structures

A policyowner wants their life insurance proceeds to be paid directly to a named beneficiary rather than through their estate. What is the main practical advantage?

  1. The sum insured increases automatically.
  2. The proceeds become exempt from all tax in every circumstance.
  3. The proceeds can be paid without waiting for probate. Correct answer.
  4. The life insured can avoid medical underwriting.

Explanation

A valid beneficiary nomination can allow the insurer to pay the benefit directly, avoiding delay while the estate is administered through probate. Tax treatment depends on the structure and law and cannot be assumed to be universally exempt.