Insurance is the most common risk transfer technique in risk management.
There are 3 layers of insurance protection.
Firstly, the social layer, provided by national schemes. For Singapore, it will be the insurance from CPF like DPS, HPS, Medishield, Eldershild, CPF Life. They are usually the most basic required and premiums are most affordable. Secondly, the group layer. This is coverage provided by employers, unions or associations. Their premiums are also relatively affordable. However, they will no longer cover when leaving the organization and there is usually a age limit, resulting in a drop in coverage when it is most needed. Thirdly, the individual layer. This is purchased from insurers at the personal level to supplement the first two layers. Enhancing the coverage in scope and depth.
Classes of insurance:
– Life Insurance
– Investment-Linked Policy (ILP)
– Health Insurance
– Personal General Insurance
The 3 main types of traditional life insurance are term, whole life and endowments. The most basic term policy is the Dependent Protection Scheme (DPS) by CPF. The premiums are the lowest in Singapore and can be paid by CPF OA. However, the limitation is that coverage is up to $46,000 and age 60. Another decreasing term policy by CPF is the Home Protection Scheme (HPS). A compulsory mortgage insurance for those using CPF to purchase their properties.
Investment-Linked Policy (ILP)
ILPs are mainly yearly renewable term insurance coupled with investment in unit trusts and the addition of more charges. They are subject to a different set of rulings, do not need trustees and fund selection is restricted to those within the insurer umbrella of funds. One advantage is the charges are transparent. However, they are numerous, tedious to compute and allows so much variation that it aims to confuse. They include:
(1) Initial sales charge – This is a one off charge factored into the bid-offer spread of the fund. Usually about 3 to 5% of the investment amount.
(2) Fund management fee – This is paid to the fund manager regardless of the performance of the fund. Usually 0.5 to 2% per annum and it is priced into (deducted from) the unit price.
(3) Benefit charge – The insurance coverage premium including all the riders are funded by deducting units. The premium is usually increasing based on the new age band.
(4) Policy fees – A flat monthly fee is charged regardless of the premium amount, to cover administrative expenses.
(5) Administrative charges – Additional fees paid for record keeping, transaction services, bank services, trustee services, and miscellaneous fees. Usually about 0.2 to 0.4% per annum and it is priced in as well.
(6) Fund switching charges – This will be charged when changing investment funds. Usually free for one switch per year.
(7) Premium holiday charges – This will be charged when the premium holiday feature is activated.
(8) Surrender charges – Charges imposed when surrendering the policy.
(9) Allocation – Amount of premiums used to purchase units is usually not 100% for the initial years. Example: 20% for 1st year; 40% for 2nd year; 60% for 3rd year; 80% for 4th year; before finally 100% from 5th year onwards.
Suitability of ILPs will be for those who have sufficient insurance cover and have excess budget which they would like to use to support their agents instead of investing in unit trusts directly.
(1) MediShield and private shield plans
MediShield is the social insurance that provides the most basic cover. The disadvantages are that it has many sub limits for each of the covered expenses, expires at age 85 and provides coverage mainly for class B2/C wards. It is also subject to deductibles and co-insurance. It is paid by MediSave. Some employers may provide the second layer of cover. However, this cover will end when leaving the employer. Medical coverage is most needed in retirement, as a result, taking up a plan then will be subject to strict underwriting conditions (i.e. it will not be accepted or existing medical conditions will be excluded). The private shield plans allow coverage beyond age 85, but it needs to be taken before age 75. It usually does not have sub limits as it is “As Charged” coverage. Some insurers even cover the deductibles and co-insurance if a rider is purchased on top of the basic plan. The MOH website provides a comprehensive comparison of all the available private shield plans. The plan is most suitable for covering medical and ongoing treatments. With rising medical cost, this insurance is most necessary to avoid cost being an issue to seek the proper medical treatment.
(2) Critical illness
It provides a lump sum benefit if the insured is diagnosed to be suffering from one of the 30 selected illness or surgical procedure. The 30 illness are chosen from a list of illnesses by the Life Insurance Association of Singapore (LIA). Their definitions have all been standardized by the LIA. The 2 types of coverage are the acceleration and additional. The acceleration coverage shares the sum assured with the death/TPD benefit. The additional coverage is a separate cover on top of the basic sum assured, hence it can be higher than the basic sum. Variations include being issued as a stand-alone policy or a rider, having an early payout for the initial stages of the illness, and providing specific coverage for only one illness like cancer. It is most suitable to provide for treatment cost that may not be included in the HealthShield like expensive overseas or alternative/experimental treatment as well as additional care giving expenses incurred when critical illness is diagnosed.
(3) Disability income
It provides monthly income in the event the insured is unable to work as a result of an accident or illness.
The definition of disability varies in that the inability to work is confined to the insured’s own occupation, similar occupation or any occupation. It is most suitable to protect against the loss of income so as to maintain the living expenses in the event of disability and differs from TPD in that the definition is less stringent.
(4) Hospital cash
It provides a daily cash benefit for each day of hospitalization. It is usually limited to a specified number of days and a life time limit. It is most suitable for the self employed who will suffer income loss as a result of hospitalization.
(5) ElderShield and private plans
It provides a monthly benefit if the insured is unable to perform 3 out of the 6 activities of daily living (ADLs), namely feeding, bathing, toileting, dressing, mobility and transferring. ElderShield is the most basic level of coverage, providing $300 or $400 monthly for 60 or 72 months. It can be paid with MediSave. The private plans enhances these plans to provide higher benefits and longer duration of payout. It can be paid with MediSave up to a limit. It is most suitable to cover disability for those aged 40 and above. TPD coverage usually ends at age 60/65, but this provides life time coverage. And it is usually limited payment of premiums.
Personal General Insurance
(1) Packaged household
It provides coverage for the building and contents.
It is usually compulsory when a person takes up a housing loan.
(2) Valuable articles
It provides coverage for items with high monetary value like antiques, fine arts, etc.
It can be an itemized or blanket coverage.
It is usually for those who keep valuable items in their homes like art or antique collectors.
(3) Personal accident
It provides coverage for bodily injury caused by solely, directly, independent, external, violent and visible means.
It is most suitable for those with a budget constraint or are involved in blue collar work or are not able to obtain any of the traditional insurance due to medical underwriting restrictions.
It is a compulsory insurance available as 3 types: Third party, Third party fire and theft (TPFT) and Comprehensive. Premiums will vary between insurers depending on the make, model, age of the car, driver’s age, occupation, experience. Note the amount of excess applicable and it is advisable to purchase NCD protection if NCD has accumulated to 50%.
Based on the risk management plan, those low frequency, high severity areas should be covered with the appropriate insurance. As insurance coverage and premiums vary between insurers, it will be prudent to get quotes from as many as possible. Insurance is usually a life long commitment, it will be wise to ensure the most value and suitable one is taken up.
Aaron Lau is an independent financial adviser in Singapore. He shares his awareness of good personal financial planning in areas of:
1. Financial Goals
2. Risk Management
4. Retirement Planning
5. Tax Planning
6. Estate Planning