This article is contributed to us by Autumn. Autumn offers a mobile application that helps us manage our money and life.
An insurance protection gap is typically the difference between how much money you will need compared to how much money you will have in the event of an unfortunate scenario.
For example, you may estimate that it will take $360,000 to raise and educate your newborn he or she enters the working world and becomes financially self-dependent. You will be working for the next close to two decades to afford this.
If you do not have any savings or life insurance, your insurance protection gap is $360,000. If you already have some savings and insurance, you may still have an insurance gap of the difference between your savings plus current payout and the $360,000 you estimate will need to be spent raising your baby.
Besides day-to-day expenses for your child, your insurance needs should also account for other important variables like the lifestyle your family is accustomed to, housing loans and other loans that will need to be paid and potentially requiring a domestic helper to care for your child and the house.
Understanding your insurance protection gaps
This scenario above highlights your mortality protection gap. You may also have another type of insurance gap in the form of critical illness protection gap, and even others including health protection gap, disability protection gap and so on.
As you enter different milestones in your life, your insurance protection gaps shift too. This justifies a regular insurance review each year or at critical milestones in your life.
The Life Insurance Association of Singapore (LIA) details insurance protection gaps for 5 common life situations: 1) young working adults; 2) newly married couples; 3) persons with aged parents to support; 4) retirees or pre-retirees; and 5) families with single income.
#1 Young working adults entering the workforce
The first thing you can consider after entering the working world is to take over the policies that your parents may have been paying for you. This will usually be your MediShield Life and any Integrated Shield Plan (IP), your critical illness insurance and possibly other types of insurance policies.
In this age group, the LIA recommends that young working adults consider IPs and critical illness plans. This is also because your insurance premiums tend to be lower when you are younger and you are likely to be healthier and without pre-existing conditions.
Source: LIA
An IP is meant to supplement your MediShield Life coverage, offering coverage in higher class wards in public hospitals and private hospitals.
At the start of your working life, you have a long and bright career ahead, but likely without much financial safety net. Hefty medical bills and income loss, due to critical illness, unforeseen health issues or death, can cause financial strain on your family, especially since you do not have much savings to draw on.
At the same time, the LIA cautions all young working adults to ensure that your total insurance premiums remain within your financial means. The last thing you want is to shed coverage after a few years because you were not able to maintain the policy. Being over-insured may also be unwise, as you will also need to consider saving for upcoming expenses such as your home, children and other important expenses, as well as investing your money to grow a retirement nest egg.
#2 Newly married couples or couples with young children
This is a common next milestone in your life after entering the workforce. In this stage of your life, critical illness protection and mortality protection becomes a priority. You have a spouse you are planning a shared retirement with and young dependents to care for.
Source: LIA
Your financial responsibilities are also likely much higher, with a long-term home loan to service and planning for your children’s education funds. On top of your critical illness plan and IP, the LIA also recommends that parents consider either term or whole life plans and an endowment plan at this stage of life.
In the unfortunate scenario you are no longer around, payouts from your term or whole life insurance will immediately go towards ensuring your spouse and young dependents can continue to have a similar lifestyle in your absence. Some part of it will also go towards an education fund that your young children can tap on when they need to.
Starting an endowment plan, or similar investment plans outside of an insurance policy, will also give you the peace of mind that an education fund will be ready for your child if he or she attends university in the future.
#3 Working individuals supporting aged parents
At some point in your career, you may find yourself sandwiched between having to raise your children and supporting your elderly parents and parents-in-law.
At this stage of your life, your financial commitments are likely going to be at its highest point. This makes it even more important to safeguard your loved ones against the possibility of losing you, along with your income for their day-to-day lifestyle needs.
Source: LIA
This stage of your life – between the ages of 40 and 49 – will also likely translate into your peak earning years. What this means is that you may need to also consider increasing your term or whole life insurance policies to match your lifestyle needs if they have progressed.
#4 Families with single income
Some families may have made the decision to sustain on a single regular income, while the other spouse takes care of the children. Such households typically need to be more conscientious about their insurance protection needs.
Source: LIA
One common area that may be neglected is the requirement to plan for two retirement nest eggs, even for the spouse that is not working. Life insurance and critical illness insurance is important for both spouses.
The family’s dependence on the working spouse is high and adequate insurance on his or her ability to continue working is required. For the non-working spouse, life insurance and critical illness insurance is important to cover the cost of getting help to raise their children if he or she is no longer around as well as paying for treatment if the spouse is diagnosed with a critical illness.
#5 Pre-retirees and retirees
In the years leading up to your retirement and even during your retirement, you will likely see less importance in your life insurance needs as your children become financially self-dependent and your elderly parents may no longer be around.
This, however, does not change your health and critical illness protection needs. If anything, you may encounter more health complications as you age.
Source: LIA
Your IP continues to protect you against large hospital bills. On the other hand, if you are diagnosed with a critical illness, the lump sum payout will be handy to go towards treatment costs and keep your retirement nest egg safe.
Understanding and closing your insurance protection gap
As you transit into different life stages, it’s important to continue being aware of your increased or reduced insurance protection needs and the gaps that exist. You can use LIA’s protection gap calculator to find out your protection needs.
To understand more about the policies you can purchase, you can leverage on CompareFIRST, a joint effort by the Monetary Authority of Singapore (MAS), LIA, MoneySENSE and the Consumers Association of Singapore (CASE), to compare life insurance and endowment products available in the industry.
The Autumn app helps you keep track of all your insurance products on one dashboard, so that you have a clearer picture of how much and how frequently you’re paying for your premiums. It also allows you to share important policy documents with your family members so that they can have access to these key documents in case of the unfortunate scenario where you are no longer around.
Also consider speaking to a trusted financial consultant to better work out your protection needs and zero in on protection gaps you may have missed out on.
In certain instances, having an insurance gap may be necessary even if you don’t realise it, due to cost constraints. Your primary goal should be for your insurance premiums to be sustainable, enabling you to continue having insurance protection, even if it is smaller than required, rather than have policies lapse when you cannot afford it.
If you are interested in the Autumn App, you can download and register for free here! Read our review of the app here.
