Life and trauma insurance – compulsory or recommended?

In 2018, Rawiri and Jenny decided to refinance their home loan for better interest rates. A financial adviser assisted Rawiri and Jenny with the refinance. The adviser also set up life and trauma insurance for Rawiri and Jenny as part of the transaction.

In early 2020, Rawiri asked the adviser to cancel the life and trauma insurance, because he and Jenny wanted to reduce their expenses due to the impact of Covid-19 on their incomes. The adviser told Rawiri he couldn’t cancel the insurance, because it was a condition of their home loan offer that Rawiri and Jenny have life and trauma insurance cover in place to ensure they could keep up with repayments if one of them lost an income.

Rawiri looked again at the loan offer and noticed the condition only recommended he and Jenny have life and trauma insurance cover, rather than requiring it.

Rawiri complained to FSCL that his adviser had misled Jenny and him into getting life and trauma insurance (which the adviser would have received a commission for) when they didn’t really need it.

 

Dispute

The adviser said at the time of the refinance he genuinely believed the wording of the condition in the loan offer required Rawiri and Jenny to have life and trauma insurance in place, but he accepted his interpretation had been incorrect.

Aside from the loan offer, the adviser said it was advisable for Rawiri and Jenny to get life and trauma insurance anyway, because if either of them lost their incomes due to a serious illness or an accident, there was a risk the other wouldn’t be able to meet the mortgage repayments. Rawiri and Jenny owned a second property which was a bare section, and the adviser said there was a risk the section wouldn’t sell fast enough to help cover repayments if there was a down-turn in the property market.

Rawiri was sure he and Jenny had multiple meetings with the adviser where he told them it was compulsory to get life and trauma insurance in order to complete the refinance. Rawiri said he and Jenny were comfortable with the risk that their second property may not sell as quickly as needed to help meet repayments if they lost an income. Rawiri was adamant he would not have got life and trauma insurance if he had understood it wasn’t compulsory. Rawiri wanted the adviser to refund all the premiums Jenny and he had paid since the refinance, amounting to $6,200.

 

Review

We reviewed the loan and insurance documentation and the adviser’s notes from his meetings with Rawiri and Jenny.

We found that Rawiri and Jenny’s insurance documents were dated before the loan offer was issued, showing Rawiri and Jenny had decided to get life and trauma insurance before the adviser gave incorrect advice that life and trauma insurance was compulsory under the loan offer. We thought it was more likely that Rawiri and Jenny had accepted the adviser’s advice to get cover because of the risk of their second property wouldn’t sell fast enough to assist with repayments.

We thought the adviser’s incorrect advice didn’t cause Rawiri and Jenny any direct loss until they asked to cancel the insurance and the adviser incorrectly told them they couldn’t cancel, because, up until that point, they wanted the insurance in place.

 

Resolution

We recommended the adviser pay Rawiri and Jenny $500 compensation for the inconvenience caused by his incorrect advice, because Rawiri and Jenny lost the opportunity to make a fully informed decision about obtaining and maintaining the life and trauma insurance when they refinanced. We also recommended the adviser pay Rawiri and Jenny $700 in compensation for the premiums they paid for the time from when they first asked the adviser to cancel the insurance until the time the cancellation was actually processed.

Rawiri and Jenny accepted our final recommendation which became binding on the adviser.

 

Insights for participants

Rawiri and Jenny’s insurance applications clearly predated the loan agreement, so we were satisfied the adviser’s incorrect advice didn’t affect their decision to get life and trauma insurance.

However, by way of a warning to advisers, it wasn’t clear from the adviser’s notes alone what advice the adviser gave at each meeting, or when the meetings occurred. As such, we thought it was unlikely the adviser’s notes would meet the record-keeping requirements of financial advice provider licensees under the new regime that applies from 15 March 2021.

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