Safeguarding your finances against life’s uncertainties is essential, especially once you are in the workforce. A solid life insurance policy can provide you and your family with a source of income should you fall ill to critical illness (CI), total and permanent disability (TPD), or death.
While most people already know the importance of insurance, many are unsure about how much coverage they would adequately need. With this piece, we will delve deeper into the protection gap in Singaporeans and determine how much you would need to be better protected against life’s unpredictability.
Importance of life insurance
Life insurance comes in two forms: term insurance and whole life insurance.
Term insurance covers a set period of time and pays out the sum assured only upon death or TPD during the coverage period. It is cheaper than whole life insurance as it does not contain a savings element — there is no cash value.
For life-long coverage, whole life insurance is what you need. You can choose to pay the premium for a limited period or throughout your life, and part of the premium goes into the savings component of the policy. Upon death or TPD, the sum assured plus any additional bonuses will be paid out to you or your family.
The sum assured in a life insurance policy is the coverage that people usually refer to when checking if you are adequately covered. This is the amount that will be paid out should you be diagnosed with TPD, death, or CI (if covered by your policy).
Read More: Life Insurance in Singapore — Whole Life, Term, and Which You Should Get
Singaporeans’ protection gaps in life insurance
Credit: Life Insurance Association of Singapore
According to a 2017 study by the Life Insurance Association of Singapore (LIA) on protection gaps in Singaporeans, the protection gap is defined as “a metric to estimate the lack of protection against the financial consequences of specific events such as death or CI.” It is measured by calculating the difference between protection needs and the resources available.
Protection needs typically include any personal and housing loans, ongoing expenses needed for dependents, including both children and elderly parents’ present and future household expenses, and additional expenses after death including funeral costs and unpaid services, after deduction of the remaining spouse’s income (if any). The available resource includes CPF and cash savings, and available insurance coverage (if any).
Credit: Life Insurance Association of Singapore
In the same study, it was revealed that Singaporeans are inadequately protected by both their life insurance and critical illness insurance.
LIA believes Singaporeans require 9 times their annual income to be sufficiently protected but sees an average person with only 7 times their annual income available. When it comes to CI, 3.9 times of annual income is recommended but Singaporeans on average only have 0.7 times coverage.
Credit: Life Insurance Association of Singapore
Being underinsured is a huge financial risk for you and your dependents. According to LIA, Singaporeans between the ages 20 – 29 and 55 – 64 have some of the biggest protection gaps.
Singaporeans in their 20s might feel they do not need life insurance as they are young and healthy, while those in their 50s and 60s might have higher household expenses while experiencing a decrease in income due to their age.
Determining Protection Needs
Say hello to Stephanie, a 25-year-old Singaporean professional with a monthly income of S$4,800. Her parents are 55 years old and purchased a small insurance policy for her when she was younger. Stephanie realises she has death and CI coverage of S$60,000 and wants to know if that is adequate.
During a discussion with her financial advisor to determine her liabilities, Stephanie is presented with this table of expenses:
| Liabilities | Monthly amount | Is it a necessity? |
| Handphone bill | S$50 | Yes |
| Utilities bill | S$200 | Yes |
| Money for parents | S$600 | Yes |
| Gym membership | S$150 | No |
| Food and groceries | S$600 | Yes |
| Total | S$1,600 |
Stephanie’s essential spending averages around S$1,600 monthly. She also sets aside S$800 for optional spending and saves the rest.
After determining the liabilities, Stephanie’s financial advisor works with her on the expected living expenses in case of TPD or CI. When asked if she has sufficient savings should she be met with an unfortunate accident that caused her to be permanently disabled, Stephanie is unable to provide an answer.
Out of her existing commitments, Stephanie realises that she could shave her gym membership, reduce the amount she spends on food, and stop giving money to her parents to save on expenses. However, should she meet with an accident that causes TPD, she will be faced with additional monthly costs including
- Medication — S$200
- Caregiver — S$850
- Follow-up doctor appointments — S$200
- Specialised transport — S$100
Her monthly expenses will be as follows:
| Liabilities | Monthly amount |
| Handphone bill | S$50 |
| Utility bill | S$200 |
| Food and groceries | S$400 |
| Medication | S$200 |
| Caregiver | S$850 |
| Doctor appointments | S$200 |
| Transport | S$100 |
| Total | S$2,000 |
Even without her current monthly income of S$4,800, Stephanie’s monthly expenses sit at S$2,000 with the bulk of it going to medical-related causes. Summing up the numbers for her, Stephanie’s financial planner got her to think about her life in terms of expenses after TPD.
| Number of years | Total expenses |
| 10 | S$2,000 x 12 months x 10 years = S$240,000 |
| 20 | S$2,000 x 12 months x 20 years = S$480,000 |
| 30 | S$2,000 x 12 months x 20 years = S$720,000 |
It is evident that Stephanie is grossly underinsured with her S$60,000 insurance. At her young age, she should be seeking at least S$480,000 in sum assured for death, TPD, and CI. This is in line with LIA’s recommendation of at least 9 times of annual salary to be sufficiently protected.
If you are shocked by how much coverage a single, working young adult needs, think about how much more a person married with kids would need.
In conclusion…
When it comes to the exact sum assured you will need to be effectively protected against life’s unexpected circumstances, there is no one-size-fits-all solution. Things such as your existing savings, liabilities on hand, lifestyle, and marital status also play a part in determining the amount of protection you will need.
It could only take one accident to wipe out your entire savings and derail your life. Getting life insurance is not just buying what is cheapest, but a process of understanding how much you need to get yourself adequately protected. Talk to your trusted advisor to understand your financial situation better, or drop us an email at ask@plannerbee.co to know more!
