First-home couple, unverified self-employed income and a request for minimum cover
Tom (33) and Ana (31) meet adviser Hine to plan a first home purchase and protection. The purchase price is $780,000 with a 20% deposit from savings, so a $624,000 loan. Tom earns $88,000 as a salaried electrician. Ana is a self-employed beauty therapist; her draft accounts for the year just ended show $72,000 of invoiced revenue, $31,000 of expenses and a $19,000 business loan being repaid at $520 a fortnight. The fact find was completed in a single 30-minute joint meeting. Ana described her income as 'about $70k'; there is no tax return, accountant's letter or bank statement on file. They owe $14,000 across two credit cards and have no emergency fund. Ana's mother has said she 'might' gift $50,000 towards the deposit. The couple want the minimum life and income cover 'because we are young and it is expensive', and want the premiums added to the loan.
1. Identify the material information gaps in this file and explain why each one matters to the advice.
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The fact find looks complete because the fields are filled in, but several entries are unverified or missing.
Ana's income. Revenue of $72,000 against a net profit of $41,000 is a large gap, and $70k is her description, not evidence. Lenders and insurers assess self-employed income on one to two years of accounts or tax records, with add-backs for the business loan and depreciation. Until that is on file, both the servicing position and the amount of income protection are guesses.
The possible $50,000 gift. 'Might' is not a commitment. If the deposit depends on it, Hine needs written confirmation, timing and any conditions, or the loan structure changes.
The $14,000 of credit card debt. Minimum repayments reduce borrowing capacity and signal a cash-flow problem; it also affects how much premium is genuinely affordable and whether protection should be added to a loan at all.
No emergency fund. This drives the choice of wait period on income protection and the risk of the whole plan failing on the first setback.
Missing areas: full budget, existing cover (employer or group schemes, any cover held personally), health and occupational details for Ana, KiwiSaver balances and contribution settings, and the couple's goals beyond the purchase.
Each gap changes either what they can borrow, what cover is suitable, or whether the recommendation is affordable at all. None can be filled by assumption.
2. How should Hine respond to the request for minimum cover? Show the reasoning, not just the conclusion.
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A client preference is a constraint on the advice, not a substitute for the analysis.
Hine should first quantify the exposure: a $624,000 joint loan, two incomes, and a self-employed client with no sick leave and no ACC cover for illness. For Ana, income protection is the highest-value cover in the plan, not an optional extra. Life cover needs to be sized against the debt and any future dependants, and structured so the survivor is not carrying the mortgage alone.
The request for minimum cover is then tested against affordability. If the real budget only supports a modest premium, the professional response is a prioritised, staged recommendation: core life cover and a realistic income protection benefit now, with a documented review trigger when Ana's income is verified or the credit cards are cleared. That is different from selling the cheapest product because it was asked for.
Hine should also challenge the idea of adding premiums to the loan. Capitalising insurance increases the debt and the interest cost, and if the cover is cancelled the debt remains. That trade-off must be explained, not assumed.
Finally, Hine must not let the couple's 'we are young' framing replace the needs analysis. Young and indebted is exactly when income protection earns its keep. If the recommendation is lower cover than the need, the file must say why, what was left uncovered, and when it will be revisited.
3. What must Hine do before making a recommendation, and how should the file record it if the couple will not provide the missing information?
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Before recommending:
- Obtain Ana's most recent tax return or IRD income summary, plus the accountant's confirmation of net profit with add-backs, or bank statements if accounts are not finalised.
- Confirm the gift in writing with amount, timing and conditions, or remove it from the deposit calculation.
- Complete a budget covering existing debt repayments, living costs and a realistic premium, and obtain a credit check.
- Collect full health and occupational information for both, and check for existing cover.
- Confirm scope: is Hine giving mortgage advice, insurance advice, or both, and is any of it outside the FAP's licence or her competence?
If the couple refuse to provide information: explain in plain terms what cannot be recommended without it, and the consequences (a smaller loan, cover based on an assumed income that may not pay out at claim time). Then either:
- limit the scope to what can be properly advised and say so in writing, or
- decline to give the advice.
The file should record the request made, the date, the client's response, the consequences explained, and the client's acknowledgement. A note saying 'client did not provide income verification' without the explanation of risk is weak evidence. The test later is whether a reader can see why the advice was limited and that the clients understood what they were accepting.