Beware poor risk insurance advice

SMSF technical expert and columnist for The Australian newspaper
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ASIC has said that risk insurance and poor advice seem to go hand-in-hand.

Peter Kell, one of ASIC’s Assistant Commissioners, recently said that many of the cases of poor or defective advice that ASIC reviews involve risk insurance products, such as death, permanent or temporary disability and trauma insurances.

This represents a good wake-up call for SMSF trustees.

Your investment strategy

For the last couple of years, SMSF investment strategies have had to be in writing and when drafting your strategy, you must consider the insurance needs of at least one member of the fund.

This last requirement isn’t designed to force an SMSF to purchase life insurance. It’s a catalyst to consider the need for risk insurance.

Recent NSW Court of Appeal case

A good example of how risk insurance advice can go horribly wrong has recently been dealt with by the NSW Court of Appeal.

The initial case had been heard by the NSW District Court.

The case involved advice by a Commonwealth Bank Financial Planner to change from a Westpac life insurance death policy to a similar policy with CommInsure, a CBA subsidiary.

Not long after the CommInsure policy was in place, the insured, Mr Stevens, was diagnosed with pancreatic cancer. He died not long after winning the District Court case. CBA wasn’t happy and appealed this decision to the NSW Court of Appeal. His appeal was run by his daughter, who was executor of Mr Stevens’ deceased estate.

CommInsure denied the claim for the policy because it decided that Mr Stevens hadn’t been honest with them about his medical conditions when he initially applied for the insurance.

Under the Insurance Contracts Act, when you apply for life insurance, you have a duty to disclose any medical information that an insurer needs to assess whether or not it wants you as a client. This duty of disclosure survives for the first three years after a life insurance policy has commenced. And as detailed in another recent article this duty continues until the insurance company has formally issued the contract.

CommInsure’s decision wasn’t in dispute in this case. The Court of Appeal justices go to some lengths to show that Mr Stevens hadn’t made full medical disclosure.

The problem for the Commonwealth financial adviser was that the Westpac policy was more than three years old and the duty of disclosure ‘escape’ clause for the insurer had lapsed. This means that even if Mr Stevens had disclosed incomplete medical records to Westpac, his claim couldn’t be rejected for that reason.

In addition, the Commonwealth Financial Planner claimed that the CommInsure policy was better from a cost perspective than the Westpac policy. The Court found this to be incorrect for several reasons including the fact that Commonwealth didn’t allow their adviser to recommend keeping an existing non-CommInsure policy. (The logic here being you can’t claim something is better when you have no information or mechanism to compare one product.)

The adviser had confined the comparison between the Westpac and CommInsure policies to reviewing the difference between the first year’s premiums for both policies. The Court found this to be unacceptable.

Issues to consider before changing life insurance policies

Here are three issues you need to consider before replacing one life insurance policy with another one:

  1. Never stop an existing insurance contract unless you’ve carefully determined you no longer need it. With this in mind, it’s dangerous to stop an existing contract before a new one is actually in place.
  2. Remember the three-year non-disclosure rule – if your existing contract is more than three years old and you take out a new contract, then the three-year rule begins again. This may be a disadvantage, especially if you accidentally don’t disclose some important medical information.
  3. Many life insurance contracts allow you to choose ‘stepped’ and ‘level’ premiums. A stepped premium means that the premium is recalculated each year based on your age, whereas the level premium remains unchanged once it has been set. In most cases, the stepped premium is initially cheaper but over time the level premiums will become cheaper. You need to carefully assess what your best option is now and will be over the period of time that you think you’ll need the insurance.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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