CMFAS Life Insurance M5 3 — Questions and Answers
Question 1: What is the principle of utmost good faith in insurance?
- The insurer always pays claims
- Both parties must disclose all material facts honestly (Correct answer)
- The premium is always fair
- Claims are processed within 24 hours
Correct answer: Both parties must disclose all material facts honestly
Utmost good faith (uberrima fides) requires both the insurer and the insured to deal honestly and disclose all material information that could affect the policy.
Question 2: What is the concept of insurable interest?
- Interest earned on premiums
- The policyholder must stand to suffer a financial loss from the insured event (Correct answer)
- The interest rate on policy loans
- The return on investment
Correct answer: The policyholder must stand to suffer a financial loss from the insured event
Insurable interest means the policyholder must have a financial stake in the continued existence of the insured — they would suffer financially from the loss.
Question 3: What is a lapsed policy?
- A fully paid-up policy
- A policy that has expired due to non-payment of premiums (Correct answer)
- A policy that has been surrendered
- A policy with a claim pending
Correct answer: A policy that has expired due to non-payment of premiums
A lapsed policy is one where the policyholder has stopped paying premiums and the grace period has expired, causing the coverage to terminate.
Question 4: What is reinstatement of a life insurance policy?
- Buying a new policy
- Restoring a lapsed policy to active status (Correct answer)
- Changing the beneficiary
- Increasing the sum assured
Correct answer: Restoring a lapsed policy to active status
Reinstatement is the process of restoring a lapsed policy to active status, usually requiring payment of overdue premiums and evidence of insurability.
Question 5: What is a participating policy?
- A policy where the insured participates in extreme sports
- A policy that participates in the insurer's profits through bonuses/dividends (Correct answer)
- A policy with multiple policyholders
- A policy that only covers participation in events
Correct answer: A policy that participates in the insurer's profits through bonuses/dividends
A participating (par) policy entitles the policyholder to share in the insurance company's profits through annual bonuses or dividends.
Question 6: What is an investment-linked policy (ILP)?
- A policy with fixed returns
- A policy where premiums are invested in sub-funds, and benefits are linked to fund performance (Correct answer)
- A policy that only covers investments
- A bank deposit linked to insurance
Correct answer: A policy where premiums are invested in sub-funds, and benefits are linked to fund performance
An ILP combines insurance coverage with investment. Premiums are used partly for insurance and partly invested in sub-funds, with returns linked to fund performance.
CMFAS Life Insurance M5 3
What is the principle of utmost good faith in insurance?