Critical illness health insurance

Dr Larry Haverkamp
The Sunday Times
18 September 2016

A problem with business versus consumers is conflict. On the one hand, firms are tempted to boost profits by selling high-margin products.

The conflict is apparent in financial services like banking, investments and insurance. A reader wrote and asked me: "How about critical illness insurance? Is it worth the money? Should I buy it?"

My analysis is that critical illness health insurance is worth the money if you have a big budget. Like a Rolls-Royce automobile, it is a nice car, but do you really need it to move from point A to point B? It goes beyond the basics. That is the short answer: Here are the details:

DOUBLE COVERAGE
The biggest reason not to buy critical illness health insurance is that it is double coverage. That is because you are already covered under MediShield Life and maybe under a private insurer's intergrated plan(IP) as well.

That makes it double coverage, which you can live without. But wait. Isn't double coverage health insurance disallowed?

Correct. But critical illness insurance is an exception.

The double coverage makes critical illness almost like gambling. If you fall ill, you win the lottery and collect a large one-time payout that you can spend however you like. You need not spend it on medical care since that is already covered by MediShield Life.

Critical illness covers 37 diseases. You can file a claim to collect if you fall ill from any of them. The more common ones are major cancers, heart attack of specified severity, coronary artery by-pass surgery, kidney failure and stroke.

Actually, your critical illness coverage can go beyond these 37 illnesses. Great Eastern Life, for example, has an add-on policy (a rider) which increases payouts and expands the coverage to 92 diseases.

But it is going to cost you. Like most things you buy, the basics are cheapest and add-ons - like extended coverage - are usually more profitable for firms and more costly for consumers.

It seems it would be important to covered under these illnesses but, as mentioned, you are covered already through your MediShield Life and possibly an integrated plan if you purchased one. Do you need an IP policy on top of MediShield Life? That is a hot topic that I will answer in the near future.

WHY DOUBLE COVERAGE
The rationale for double coverage of health insurance is that its purpose is to pay for lost wages.

OK. There is a certain logic to that. You have one insurance policy - MediShield Life - to pay for your medical costs and another to pay for lost wages.

The only issue is your wages may not be cut off when you fall ill. Many employers continue to pay wages if the time off is not too long, like for a month or so.

It also depends on the job. Lower income and hourly workers are more likely than salaried workers to have their wages cut when they miss work because of illness. Ironically, they are also the ones who are the least able to afford critical illness health insurance with its riders.

A side point worth considering is the employer has an insurable interest when employees continue receiving wages while on medical leave. It is reasonable therefore that employers - rather than employees - provide the insurance coverage.

AN UNUSUAL RISK
Another side point: Could an unintended effect of critical illness insurance be that it could increase risk to the insured?

For example, I have a friend who had heart bypass surgery and made a claim under his critical illness plan. He was relieved that bypass surgery was one of the 37 illnesses covered under his plan but unfortunately. it covered triple bypass surgery and he only needed a single bypass.

So his claim was denied, and he had to pay with MediShield Life and his own savings. While it was a surprise, his employer continued to pay, so his costs were manageable.

He made the prudent decision. but it is an individual choice and someone on a budget might be tempted to delay the surgery. It is risky, but exactly how risky is not known for many diseases.

The joke at the time was he should have asked the doctor if he would please do two more bypasses since he was in there working on his heart already.

Then he could have collected on this critical illness insurance. Of course, it was only a joke since no doctor would do that, and my  friend didn't even ask the doctor.

A Sunday Times article from 2011 told the story of breast cancer patient Theresa Tan who had her critical illness claim rejected because hers was an early stage breast cancer.

She had three critical illness policies and was surprised to learn that all covered only later stages of cancer. All rejected the claims she made for her mastectomy surgery.

lhaverkamp@smu.edu.sg

An adjunct professor at SMU, Dr Haverkamp contributes this column weekly to help our readers understand money matters better

Four rules of thumb

Dr Larry Haverkamp
The Last Word

1. RULE OF 72.
How long does it take to double your money?
There is an easy way to get a quick and close-to-perfect answer. It is to use the formula (number of years) x (interest rate) = 72.

Let's say the interest rate is 4 per cent. Then how long will it take to double your money? (Answer: 72/4 = 18 years.)

Of course, you can do the same calculation to determine the interest rate you need for money to double. Example: If you will invest for 10 years. you need to earn 7.2 per cent interest (= 72/10) to see your money double.

2. HOW MUCH TO PUT IN SAFE INVESTMENTS?
People often wonder how to admit their portfolio as they get older. Most think. quite correctly, that you should accept a lower return and invest more cautiously as they age.

That is because if you invest in risky assets and lose money when you are old you will have less time to earn it back.

A good rule of thumb is your per cent of safe investments should equal your age.

For example, if you are 30 years old, you might hold 30 per cent of your assets in safe investments like your CPF accounts and fixed deposits. The other 70 per cent would go into risky investments like stocks. If you are 90 years old. you would put 90 per cent of your wealth in safe investments.

The hard part is figuring out which assets are safe and which are risky. How about your house? Is it safe or risky?

The answer is "safe". Since home prices appreciate over time, sharp price corrections are rare and it is an asset that most of us hold for the long run.

Another major asset is your CPF money. Is it safe or risky? It is super safe for each of your CPF accounts, which includes Ordinary, Special, Retirement and Medisave accounts.

What about whole life and endowment insurance policies? Those are also safe.

Finally, how about a car? That one is a bit of a surprise since it should not be considered safe or risky. Since it depreciates over 10 years. it is part of your consump-tion and not an investment.

3. HOW MUCH SHOULD YOU SPEND AFTER YOU RETIRE?
The retirement age is 62 and you probably know someone who is retired. Of course, you will retire someday too. It is helpful for retirees to know how quickly they can draw down their savings once they stop working.

A common rule of thumb is to spend 4 per cent of your assets every year. At that rate, your assets will last another 25 years even if you earn zero per cent interest. Of course, they will probably last longer since you will probably earn a little interest, at least.

How about your retirement and other CPF accounts? Are those part of your assets? Yes. And you should also count your CPF Life payouts as part of the 4 per cent drawdown.

For example, if you retire with $1 million in assets (including CPF) then your 4 per cent drawdown comes to 540,000 per year, which is $3,333 per month.

If you receive $1,000 per month from CPF Life, the 4 per cent rule says you should take $2,333 from your other savings for monthly living costs.

One more question: Should you include your home as one of your assets?

It is an important question and the answer is usually "No". That is because most people don't sell their home after they retire, so they wouldn't use it to fund their retirement.

Keep in mind that if your mortgage is fully paid by the time you retire - which it usually is - then it won't cut into your monthly income like it did in your working years. Eliminating this major expense makes it easier to live on a lower retirement income.

4. HOW MUCH SHOULD YOU BORROW?
For most of us, the biggest debt is our home loan. Next are car loans. After that are our personal loans, credit card debt, renovation loans and even pawnshop loans.

How much should you borrow from each?

A big part of that question has been answered for you with new housing rules concerning your Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR). The MSR limits your home loan to 30 per cent of gross income and TDSR limits total debt to 60 per cent of gross income.

For example. the MSR rule is that monthly home loan payments divided by gross income cannot exceed 30 per cent. Gross income includes your own CPF contribution but not your employer's.

TDSR is monthly loan payments for all debt divided by your gross income. When you purchase a flat, your new home loan cannot push your MSR and TDSR above the limits.

The purpose is to prevent home buyers from over-leveraging as well as to keep home prices affordable.

By the way, the TDSR max of 60 per cent applies only to home loans. If a car loan, for example, pushes your TDSR over 60 per cent, it will not affect your ability to take a car loan.

lhaverkamp@smu.edu.sg

6 little-known facts about the CPF

Lorna Tan
The Straits Times

Published
Sep 4, 2016, 5:00 am SGT

More members are looking at putting more into CPF accounts with better rates amid low yields elsewhere

With the Central Provident Fund (CPF) enhancements making headlines in recent months, more CPF members are waking up to the fact that there is a viable investment tool in their backyard.

The low-yield environment makes even the Ordinary Account rate of 2.5 per cent appear attractive, not to mention the Retirement Account (for those above 55), which attracts up to 6 per cent interest.

The chatter these days seem to be skewed towards how people can put more into CPF to grow their nest egg, rather than withdrawing.

To recap, the first slew of recommendations by the CPF Advisory Panel was announced early last year. They involve different payout options and the flexibility of deferring payouts up to age 70 so as to receive more cash later. Last month, the last few recommendations, which include a CPF Life escalating payout option, were announced.

Despite the CPF Board's publicity campaign and articles written about the changes, some still find the CPF schemes complex and difficult to understand, judging from queries to The Sunday Times, as well as those posed during the question-and-answer session at the CPF Retirement Planning roadshow on Aug 27.

The first recommendations by the CPF Advisory Panel last year involve different payout options and the flexibility of deferring payouts up to age 70. Last month, new recommendations, which include a CPF Life escalating payout option, were announced. ST PHOTO: KUA CHEE SIONG

Here are six little-known facts about the CPF:

1. TOPPING UP YOUR CHILDREN'S CPF ACCOUNTS

Every Singaporean newborn today has a CPF account set up for him or her by the Government for the purpose of receiving the $4,000 Medisave grant.

For children who are Singapore citizens or permanent residents, a CPF account will be automatically created when a first top-up or CPF contribution is received.

Some wealthier CPF members or those with excess cash have opted to use the CPF as a legacy for their children or grandchildren by topping up their Special Accounts the moment they are born.

In fact, you can contribute up to the prevailing Full Retirement Sum (FRS) of $161,000 into the newborn's Special Account in one go, under the Retirement Sum Topping-Up Scheme.

Some members have already done so.

Imagine the power of compounding over 55 years.

Assuming the Special Account's floor interest rate remains at 4 per cent, your initial contributions would compound to some $1.5 million over the next 55 years.

Another way of topping up your children's CPF accounts is to use the Voluntary Contribution Scheme, currently capped at $37,740 a year.

Contributions can be made to the Medisave Account only (up to the Basic Healthcare Sum) or can be split among the Ordinary, Special and Medisave accounts.

However, bear in mind that unlike cash top-ups to other loved ones like spouses, parents and siblings, you do not receive any tax benefit for topping up your child or grandchild's CPF accounts.

Of course, not everyone will be comfortable with locking up funds for 55 years.

Some financial experts recommend that it would be better to invest the same amount in equities and low-cost index funds - given the very long investment horizon that a young child has - which should reap potentially higher returns.

2. CPF AS A FIXED DEPOSIT OR FIXED INCOME ALTERNATIVE

Some CPF members have taken to actively transferring their Ordinary Account savings to the Special Account to earn the higher interest rates.

But if your Special Account balance - including savings withdrawn under the CPF Investment Scheme - has reached the prevailing FRS, you would be unable to do further top-ups.

In the chase for yields, even the Ordinary Account interest rate of 2.5 per cent a year is not to be sniffed at, particularly if you are comparing it with fixed deposit rates which have fallen to paltry levels. Even the average annual returns of some bonds, such as the Singapore Savings Bonds, have dipped below 2 per cent.

Some insurance policies with guaranteed returns and a fixed tenure - usually three to five years - also pale in comparison with the Ordinary Account interest rate.

If you are below 55 and are confident of setting aside the requisite retirement sums at 55, you can consider the Ordinary Account as an alternative fixed deposit instrument but with less liquidity. Because of the lack of liquidity, this works better for those who are close to 55 and/or are confident they have no need for the cash.

For example, if you are 53 years old, you can park your spare cash savings in the Ordinary Account and consider it as a two-year fixed deposit. This is because if you are able to set aside sufficient savings in your Retirement Account, you can withdraw the rest at age 55 or later, whenever the need arises.

And you can still use the Ordinary Account savings for other investments under the CPF Investment Scheme and to purchase properties, after setting aside $20,000 in your Ordinary Account.

3. CASH REFUNDS FOR CPF SAVINGS USED FOR PROPERTY PURCHASES

One way of putting cash into your Ordinary Account is to do so via a full or partial refund of the CPF savings that you had previously withdrawn for property purchases plus the interest accrued on them.

Some members wrongly believed that they could refund the CPF savings used for their properties only upon the sale of these properties.

Even if the properties are unsold, you can make cash refunds by filling out a CPF form and indicating which property you are making the refund for. However, you should note that such cash refunds are irrevocable.

4. ZERO ORDINARY ACCOUNT BALANCE

Some members wanted to know if it is possible to deplete the Ordinary Account to zero when transferring CPF savings from that account to the Special Account, and still earn the higher interest rates.

This question was raised during the CPF Retirement Planning roadshow. Mr Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, responded that it is possible.

For members below 55, when the Ordinary Account has zero balance, the first $60,000 in the Special Account savings will attract 5 per cent while the remaining balance will enjoy 4 per cent interest.

5. CPF WITHDRAWALS

For members who are 55 and older, have the requisite retirement sums in their Retirement Account, and still have balances in both the Ordinary and Special Accounts, withdrawals will be made from the Special Account first before the Ordinary Account.

CPF said that this is because CPF members may still have commitments such as housing, education and investment after turning 55.

The board says: "As Ordinary Account savings can be used for continued participation in schemes after 55, the withdrawal sequence is catered to the needs of the majority of Singaporeans. Nonetheless, members who wish to benefit from CPF attractive interest rates have the option to top up their Retirement Account under the Retirement Sum Topping-Up Scheme."

6. FREQUENCY OF CPF WITHDRAWALS

Members are not restricted to only one withdrawal a year. Members who have withdrawable balances in their CPF accounts may submit an application any time and the Board will assess the application.

The amount of money that the member may withdraw will still be based on the applicable withdrawal rules and it does not change the amount of savings that can be withdrawn by the member.