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Sunday, September 10, 2017

Look out for gaps in insurance coverage

Many are under-insured, so do check if you and your loved ones are adequately protected

Lorna Tan
Invest Editor/Senior Correspondent
10 September 2017

No one wants to be caught short when a life crisis strikes, so it's no wonder that the risk of being financially unprepared tops the list of concerns among Singaporeans.

Buying appropriate insurance cover is a way of transferring this risk and getting some protection, but how much is enough and what policies should you consider?

A 2012 study by the Life Insurance Association Singapore (LIA) on under-insurance identified a $462 billion gap for working Singaporeans and permanent residents.

This gap is defined as the protection need (death coverage) of all economically active adults here minus Central Provident Fund savings and existing insurance coverage.

On an individual level, it comes to $242,500 for a working adult or 3.7 times his annual income, after taking into account CPF savings.

Against a backdrop of Singapore's rapidly ageing population, a growing incidence of chronic diseases and escalating healthcare costs, LIA has commissioned a similar protection gap study to assess the current level of under-insurance. The results are expected to be released early next year.

This time, it aims to measure two aspects of under-insurance - the mortality protection gap and the critical illness cover gap.

The 2012 study did not include the critical illness component.

Whether as individuals or families, we are exposed to various kinds of risks, says Manulife Singapore chief executive Naveed Irshad.

"There is the pertinent risk that a critical illness or unforeseen accident could bring about financial disaster in a family - from the sudden financial burden of hefty medical bills to the potential loss of household income due to the inability to work," he says.

"Such unplanned-for problems would put a dent in household finances, compromising the ability to meet financial commitments."

Ms Myra Pang, Great Eastern's head of customer propositions and marketing for group product management, notes that the provider gains assurance when loans, household expenses and education funding are taken care of. With these issues settled, family members will also be relieved of heavy financial burdens.

LIA defined the protection need as the sum required by dependants over a defined period, in the event of the main breadwinner's death, to take care of numerous expenditures such as funeral expenses, personal and housing loans, and ongoing expenses for children, elderly parents and spouses.

What they cover
Term insurance
Payout in the event of death and total and permanent disability within a specified period

Whole life insurance
Provides protection and savings

Critical illness insurance
Lump sum payout in the event of critical illness

Disability insurance
Payout to cover against loss of income in the event of disability due to either an injury or illness

Personal accident insurance
Payout in the event of accidents

Hospitalisation insurance
Protects you from hospital charges

Long-term care insurance
Monthly payouts if you are unable to perform activities of daily living


The protection gap is the protection need less an individual's CPF savings and insurance coverage and other income-producing assets left behind after death. Note that the protection gap is only relevant for economically active adults with at least one dependant.

LIA executive director Pauline Lim says the inclusion of critical illness cover in the protection gap study is timely in view of Singapore's falling old-age support ratio, rising cost of living and increasing incidence of chronic illnesses.

In fact, the rising cost of healthcare continues to be an important issue whether you are planning for retirement or already retired.

A recent HSBC report found that 82 per cent of working-age people believed retirees would have to spend more on healthcare in the future, while 85 per cent were concerned about being able to fund their healthcare.

And 50 per cent of working-age people here are worried about the availability and affordability of healthcare, compared with the global average of 25 per cent.

Mr Andrew Yeo, NTUC Income's general manager for life and health, points out that Singapore has the third-best life expectancy rate in the world, at about 83.1 years, according to the latest World Health Organisation statistics.

"However, Singapore has an average healthy life expectancy of 73.9 years - this refers to the number of years that a person can expect to live in 'full health' without disease and/or injury," he adds.

"This means that the average Singaporean can expect to be suffering from illnesses and/or be afflicted with injuries for almost 10 years of his living years, which could adversely affect the quality of his life."

Mr Brandon Lam, the Singapore head of the financial planning group at DBS Bank, says that a standard rule of thumb is to take 10 times your annual earnings as your protection gap.

However, many factors need to be considered, including your life stage and remaining estimated mortality years, and the number of dependants you have and their ages, as well as any outstanding liabilities such as mortgages, and any inheritance or assets set aside.

For business owners, other considerations would include tax liabilities and/or capital that must be set aside in the event that you are unable to continue working.

Providend chief executive Christopher Tan believes that how much is enough really depends on individuals, so his company does not apply a standard rule of thumb when advising customers.


He suggests calculating the capital that would be needed on your death by multiplying your estimated annual income by the number of years required to replace that income until your youngest dependant becomes independent.

Let's say you are 35 now and your planned retirement age is 65. If by then, you will have no more dependants, you will need 30 years of insurance coverage.

"Take into consideration university education costs for your children, all outstanding loans, gifts to beneficiaries, and additional capital that you wish to give your family to meet unexpected expenses," says Mr Tan.

"Then calculate the existing resources you already have by taking into account your existing death coverage, your company insurance coverage, bank deposits, CPF savings and other investments, and any other income-producing assets (for example, additional investment properties that can be sold)."

The difference between the capital needed and the existing resources that you have is your protection gap.

In addition, you can go to and use the Life Insurance Calculator to work out your protection gap.

Tokio Marine chief executive James Tan says term insurance is a good starting point for an individual who wants to plug a protection gap. The cover is for a specific period, and offers payouts in the event of death or total and permanent disability.

Providend's Mr Tan points out that buying insurance to replace your income in the event of death or total and permanent disability is a temporary requirement. This is because the need for income replacement does not exist once you are retired and your dependants no longer rely on you.

He adds that, for most people, the replacement amount required is typically large, so the most affordable and practical way to get yourself sufficiently covered is through term insurance.

On the other hand, whole-life insurance is useful when your need is a permanent one, such as having to pay for alternative treatment that is not covered by hospital plans when you are critically ill.

In this case, you have to decide if you want insurance cover for such a need or if you prefer to absorb the risk and self-insure. This is because not every risk needs to be covered.

Some people might not feel that compelled to buy cover for alternative treatment, while others might not have the budget to do so. And whole-life and/or critical illness plans are expensive.

Mr Lam of DBS explains that whole-of-life and jumbo universal life plans are cash-value policies and they, therefore, require higher premiums.

"They are suited to individuals who expect the return of cash values upon maturity, or the surrendering of such policies," he says.

"Term insurance does not have any cash value, and is, therefore, more affordable and more commonly used to bridge the protection gap at a lower cost."

First, work out how many years you need the insurance for. The second step is to determine how much you need. You can then look for plans that are the most suitable and cost-effective for you.

It is not always true that the cheapest is the best but, for term insurance, this is generally valid as such plans are plain vanilla, pure protection policies without the bells and whistles of other policies such as whole-life, says Providend's Mr Tan.

Ms Nancy Wu, who heads product management at Etiqa Insurance, suggests you should look at the policy's tenure (whether the coverage period is sufficient to meet your needs), the premiums (whether they are affordable) and whether the cover amount is enough.

Before forking out premiums for a term plan, do assess your financial needs and your budget. It is also prudent to review your financial portfolio regularly, says Ms Ho Lee Yen, AIA Singapore's chief marketing officer.

After all, as you reach different life stages, your financial and health needs will evolve, she notes.

Some financial experts such as chief executive Ian Martin at HSBC Insurance Singapore believe that ways to plug these protection gaps are not limited to just basic term insurance.

Depending on the cover and concerns that a person wants to address, he or she could seek other solutions, says Mr Martin.

For example, you could consider taking up a critical illness plan, particularly if you have a family history of major illnesses.

AIA's Ms Ho says that, beyond just term insurance, which typically covers dependants' expenses if the insured person dies, critical illness insurance is equally important if you fall sick and want to ensure that you can cover any additional expenses and focus on recovery.

Most insurers now offer critical illness plans that cover 102 to 106 medical conditions. The plans pay 100 per cent of the sum assured in the early, intermediate and critical stages (note that terms and conditions apply).

Insurers also offer mortgage plans. This is a reducing term insurance policy that provides financial protection against death and total and permanent disability for a specific period, say, up to the age of 70.

Ms Ho says that it is also important to insure yourself against the loss of income in the event of disability or inability to work due to either an injury or illness.

One plan to consider is AIA Premier Disability Cover, which guarantees a benefit payout regardless of any future changes to your income or payouts from other disability income policies.

This provides vital financial stability and peace of mind while you adapt to your new situation, says Ms Ho.

Mr Daniel Lum, Aviva Singapore's director of product and marketing, recommends looking at long-term care, hospitalisation and personal accident plans as well.

Aviva offers MyCare (ElderShield), which has a default payout period of six years if you are unable to perform at least three out of six activities of daily living, such as feeding and dressing yourself.

Tokio Marine Life Insurance Singapore has TM Protect 1, a disability plan that provides payouts upon the loss of the ability to carry out a single daily living activity.

"Disability income plans provide necessary financial support to individuals at the onset of disability by covering costs, such as those related to rehabilitation and mobility aids," says Tokio Marine's Mr Tan.