How Much Insurance Protection Do I Need In 2023?

How to plan your insurance coverage to be financially secure—now, and into retirement

It may be old news but the sobering fact remains - according to a 2017 Protection Gap Study by the Life Insurance Association (LIA) Singapore, for the average Singaporean working adult, there is a critical illness protection gap of >S$250,000 and mortality protection gap of around S$170,000.

With the rise in living costs from inflation, healthcare and medical costs will increase too. This raises the question: how many of us are insuring ourselves adequately? What is considered too much or too little? Can we get just enough coverage?

With that, it then makes sense that when it comes to our finances, protection planning should form a key tenet of our plans. With the startling gaps from the study though, it does seem that some of us may be one unexpected event away from a potential financial crisis.

Such scenarios are commonplace, whether it’s in the headlines or from anecdotes. An acquaintance of mine was a caregiver for his ailing parents and had to almost empty his savings to pay off medical bills due to insufficient insurance.

What is Insurance?

The basic concept of insurance is that one party, the insurer, is able to guarantee payment for an uncertain financial event. The other party, insured or policyholder, is willing to pay smaller premiums to the insurer for protection from these uncertain events, such as death, critical illness, and permanent disability.

What is the core protection we should be getting from insurance? Broadly speaking, they fall into three categories:

1. Life insurance

Covers you over a period (term life) or up to 100 years old (whole life)

Coverage for	Plan	How it helps
Death of a breadwinner	Life Insurance, e.g. Dependants’ Protection Scheme (DPS), which covers death, terminal illness or total permanent disability (TPD)	Supports the family financially due to the loss in income
Permanent disability	Life insurance	Payout covers living costs for the insured and family
Death of home loan borrower	Mortgage reducing insurance e.g. Home Protection Scheme, which covers HDB flat owners using CPF savings or cash for a housing loan	Pays off the outstanding mortgage settlement if the mortgagor passes away
Savings plan with death and total permanent disability coverage	Endowment plans	Typically used for short to mid-term goals, such as a wedding or child’s education. Low-risk with guaranteed return

2. Health insurance

Covers hospitalisation, critical illness and medical expenses

Coverage for	Plan	How it helps
Medical bills, hospitalisation	Medical insurance, e.g. MediShield Life (for all Singapore Citizens and PRs), Integrated Shield Plans, other hospital and medical plans and riders.	In the case where you’re hospitalised due to illness or accident, the policy covers your treatment and hospital stay. You may also purchase a rider to cover the co-payment portions (e.g. deductible and co-insurance) not covered under the main plan.
Critical illness	Critical illness insurance	Upon a critical illness diagnosis, the insurer will make a payout after ascertaining the diagnosis. There are also multi-claim plans to cover recurring illnesses.
Long-term care for disability	ElderShield, ElderShield supplements, CareShield and CareShield supplements	Pays a fixed monthly amount for long-term treatment upon the insured’s inability to perform at least 2 “activities of daily living” (ADL) such as bathing and dressing.
Loss of income due to hospitalisation	Hospitalisation cash insurance	Provides income if you're hospitalised

3. General insurance

Covers your assets and liabilities such as house, car, pets and travel

Coverage for	Plan	How it helps
Home contents	Home contents insurance	In the event of fire or theft, this plan covers the cost of repairs or replacement if you suffer loss or damage to your home or its contents.
Pets	Pet insurance	Surgical expenses due to your pet’s injuries, sickness, specified congenital and hereditary conditions, third party liability, chemotherapy
Damage to your car or theft	Car insurance	Covers the cost of repairs or a replacement
Damage to your home	Fire/home insurance	Covers the cost of reinstating damaged internal structures, fixtures, as well as areas built and provided by HDB
Loss of personal belongings, trip delays/cancellation, cost of medical care during travels	Travel insurance	If medical attention or an extended stay is required due to flight delays, travel insurance can cover the costs up to the sum assured.

How to ensure we get core protection

When it comes to protecting ourselves, our dependents and the things we value, optimising our coverage is key. But how does that scenario play out during a life stage where the focus is on increasing our earning power to hit other financial goals, such as setting aside an emergency fund or achieving financial independence and retire early (F.I.R.E.)?

Kyith Ng, author of financial blog Investment Moats, believes that when it comes to optimising coverage on a low starting income and trying to get the right protection, the base wealth protection should not kill your wallet.

In an article where he shared how he optimised his premiums, he factors in his annual expense, which averages at S$24,000 a year. While conservative by today’s standards, the other question we had was, why is it important to factor in this figure?

Kyith shares that earlier in his career, he built the correct mental insurance blueprint, which led him to build a strong foundation to optimise his premiums.

“In general, know what are the health risks that you wish to hedge, how big is the impact, how high is the probability, know yourself well and buy enough coverage,” he shares.

He prioritises core protection plans as:

Most important: Health insurance, disability insurance
Important: Advance-stage critical illness, life insurance
Less important: Health riders to cover co-payment, personal accident, early critical illness

“Knowing these layers allows you to reflect hard. In the event that stuff happens, would you want to bear the monetary risk, or do you want the coverage?”

Having bought seven policies at different junctures of his life, he jokes, "I always thought that my life wasn’t worth so much but that if I maintain my insurability I can scale up over time.

"So I got S$100,000 worth of SAF Insurance, which I added another S$100,000 eventually as the premiums were reduced over time. When I started work, I got a $100,000 Term from my AIA Tied Agent. I also got a S$100,000 term and a S$50,000 limited whole life from my IPP Financial Adviser.

"The thinking behind the limited whole life is that if I finish paying the premium for 20 years, I would have secured a life cover of death, total permanent disability (TPD), and critical illness."

Should we mix insurance with investments?

Before you purchase any financial product, it is important to understand what you are spending on. Some policy buyers may consider investment-linked products (or ILPs) for their hybrid nature of offering insurance coverage with an investment component.

One can choose between a single or regular premium ILP, where the premiums are used to invest in units in one or more sub-funds. As the return is dependent on the funds performance, there is usually no guaranteed cash value for ILPs.

As with all investments, the investor bears the risk of losing his capital and having to top up additional cash for the losses incurred.

It’s worth noting that this type of plan becomes more expensive after the policyholder turns 50, as more of the premium goes to mortality coverage rather than investment.

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How much insurance is enough?

To answer that question, it helps to bear in mind the primary role of insurance, which is to protect you, your family, or the things you value from financial loss.

The key is to start small and scale up incrementally as you progress through your career. Working backwards, you will derive the minimum coverage that does not create a huge dent in your pocket.

For life insurance, one should get the coverage when you’re young and healthy, such as after stepping into the workforce. Not only does it get more expensive with age, it is subjected to exclusions for certain pre-existing health conditions.

For policies such as critical illness plans, conventional wisdom states the coverage should approximately be around 5-10 times of the insured person’s annual income. This is to help tide the insured and his family over this period of financial hardship.

For Kyith, he recalls that his late parents did not have any insurance policies, which was a problem for them and remained a problem in the later years of their lives.

To avoid over or under-insuring ourselves, Kyith suggests two tips to manage our insurance coverage more efficiently:

Re-evaluate your policies from time to time. Use pivotal life events such as birth of a child, passing of a spouse, marriage, increase in work income, inheritance as triggers to review your insurance needs
Always good to check with a trusted and experienced adviser regarding whether you have some blind spots

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How Much Insurance Protection Do I Need In 2023?

Sihan Chia