This article was contributed to us by AIA Singapore.
Insurance is a topic many young Singaporeans try to avoid. According to the Life Insurance Association (LIA), close to 42% of Singaporeans and Permanent Residents (PRs) aged between 20 and 34 do not have a single life insurance or critical illness policy.
Even though many of them may understand the importance of insurance, they could be dodging such conversations due to several reasons, including:
1) Not wanting to talk about morbid topics such as injury, illness and death;
2) Thinking they’re young and healthy enough to delay insuring themselves;
3) Having difficulties ascertaining the level of insurance coverage they require;
4) Assuming insurance is too expensive or complex for them to start buying;
5) Fearing financial advisors may try to upsell or mis-sell insurance products.
While some of these are valid concerns, it does not justify ignoring insurance coverage altogether. Doing so leads to a negative consequence for young Singaporeans – living with a protection gap.
What Is A ‘Protection Gap’?
Your protection gap is the estimated difference between your protection needs and the combined amount of your total savings (including CPF monies) and existing insurance coverage. When you have a protection gap, it means you may not have sufficient insurance coverage for you or your dependents to pay for expenses and continue to enjoy the same standard of living if anything happens to you.
For the underinsured, this means that dependent family members, especially young children, spouses and elderly parents, may not be able to continue their current lifestyles without your income. For insurers, this not only means a lower client base, but they are also unable to apply an optimal level of risk pooling for its clients.
There are two main forms of protection gaps an individual may face – mortality protection gap and critical illness protection gap.
Mortality Protection Gap
Mortality protection gap is defined as your financial gap to cover the needs of your dependents over a defined period in the unfortunate event of your death. According to LIA, the mortality protection gap in Singapore is estimated to be nearly $355 billion, or 2.1X annual income, as at 31 December 2016.
In the event you are no longer around, you want your dependents to be able to continue living similar lifestyles, and not have to worry about the debt and financial commitments left behind.
Critical Illness Protection Gap
The critical illness protection gap is defined as your financial gap to cover the needs of your dependent as well as yourself, assuming a critical illness recovery period of five years. According to LIA, the critical illness protection gap in Singapore is estimated to be nearly $538 billion, or 3.1X annual income, as at 31 December 2016.
In the event that you are diagnosed with a critical illness, you will unlikely be able to work but still retain all your financial commitments. Further, you may even have to incur additional expenses, such as healthcare costs, a domestic helper as well as other related costs. Covering your critical illness gap will enable you to replace your income and focus on recovering with peace of mind rather than stress over your financial obligations at a crucial time.
LIA defines your insurance protection needs in three broad categories.
(1) On-going expenses for dependents
This includes expenses for your children, including basic living necessities, education, allowance, entertainment and others. Expenses for your spouse and other adults, including basic living necessities and others. Expenses for your elderly parents, including basic living necessities, allowance, healthcare and others.
(2) Personal and housing loans
This includes your personal and housing loans, as well as any other debt that you will be leaving behind, including credit card debt or motor loans, which your surviving household members may be liable for.
(3) Additional expenses
This includes your funeral expenses (in such a scenario) as well as any unpaid services your dependents will need to incur in the future, such as hiring a domestic worker.
In the scenario you are diagnosed with a critical illness that prevents you from working, an additional consideration for your basic living necessities and other relevant expenses need to be taken into consideration.
Carrying a substantial protection gap is a big risk, as you could be jeopardising your, and your family’s, financial futures if you do not have sufficient funds to tide through a sudden loss in your income.
Insurers Playing Their Part
Insurers in Singapore have taken the first steps across multiple approaches to help young Singaporeans understand the importance of narrowing their protection gap from an early age.
AIA runs their own Life Matters blog aimed at engaging and educating Singaporeans about living healthily, planning for the future and experiencing life. This add another resource for young Singaporeans to tap on to continue building their financial and insurance literacy.
With changing consumer preferences when it comes to purchasing products and services, onboarding Fintech, or InsureTech, solutions is key. Technological solutions can inspire customers to live healthier and streamline the customer experience.
For instance, with mobile apps, insurers are able to create meaningful interactions with their customers by partnering them in their efforts to boost their physical well-being. Policyholders are also empowered with on-demand access to their policies and does away with cumbersome paperwork and forms.
Any time, any where, customers can access an overview of their own policies, which encourages them to kick-start new conversations with their trusted financial advisors to close newly-discovered coverage gaps.
Training And Recruitment
To engage younger Singaporeans, insurers have been reaching out to students in universities to educate them on the importance on financial literacy and recruit interested graduates. Committing time and resources to recruit and mentor younger advisers is significant because these advisers understand the unique situation of their generation of Singaporeans and would be able to meaningfully engage them by offering crucial insurance coverage to close gaps in their insurance coverage.
What You Can Do To Plug Your Protection Gap
With the recognition of the importance of the narrowing your insurance gap, you will be able to give your loved ones financial security for their future rather than leave things to chance.
You’ll first need to understand how much you, your family and other dependents would require in an unforeseen situation where you are unable to work anymore, and plug any gaps in your coverage. You can then utilise the key inputs that the LIA has included in its online calculator to start estimating your protection needs.
By taking into consideration what you’re already insured for and certain assets that you own, you’ll be able to figure out your protection gap. Alternatively, you can contact a trusted financial advisor to start discussing your insurance needs today.