This is the first major announcement of an overhaul of Singapore’s life insurance industry that began in April 2012. This gives you, the consumer, a reason to celebrate (cheaper premiums! No more pushy agents) and an opportunity to look into what some of us have been putting off for the longest time (adequate insurance cover).
How Does This Affect You?
Come next year, you will be able to purchase simple insurance products directly from an insurer without having to pay the usual commissions embedded in insurance premiums. It is estimated that the premiums of these policies will be approximately 5-10% cheaper than currently.
You will be able to buy $400,000 coverage per insurance agency without paying commissions, with a limit of $200,000 for whole life insurance. (Yes, this means that if you need $800,000 coverage, you can simply buy $400,000 each from 2 insurance companies, at zero commissions). This will benefit you if you are aged anywhere from 18 to 65 years old.
What Types of Insurance Can You Buy Directly?
3 types of insurances are included:
Term life insurance with TPD cover
This is the cheapest form of insurance with the highest coverage for a fixed number of years that you buy the insurance. You are only paying for the protection function with no investment element. The premiums you pay are written off as expenses if there are no claims.
TPD cover stands for Total Permanent Disability Cover and is an add-on feature (or ‘rider’) to your insurance policy which pays out a lump sum should you be incapacitated and unable to work (e.g inability to perform daily activities or loss of limbs/sight etc). The definition and payout options differ across insurance companies.
Whole Life insurance with TPD cover
This is usually many times more expensive as it covers you for whole of life and incorporates a savings element. The premiums you pay are invested and paid out in a lump sum upon death, or TPD, if you buy the add-on.
Critical illness rider, added on to either of the above
This is important and pays you a lump sum in the event of a critical illness such as cancer or heart attack that helps you to pay for medical treatment. This is typically quite expensive as it covers over 30 critical illnesses. It is important as this can potentially wipe out your savings if you need to seek costly medical treatment. It needs to be bought in addition to a term or whole life insurance and not alone.
What types of insurances are not included? (i.e. You will still need to go through a financial advisor)
- Health insurance (including integrated Shield plans)
- Endowment policies (essentially ‘savings’ type of policies for your child’s education or retirement)
- Investment-linked policies (policies bought over a fixed term
- Annuities (policies that pay you a stream of income in your golden years)
Should You Cancel Your Existing Policies?
Certainly not, especially for TPD or Critical Illness riders as these require underwriting. What this means is that if your health has deteriorated since you bought these, you may not be able to buy these coverage or you will need to pay higher premiums.
As these direct channels will only be made available next year, it makes sense to hold on to your existing policies and take this time to review your insurance needs. Any policies you intend to cancel should only be done after you have bought the cheaper replacement policies.
How Much Should You Buy?
The rule of thumb of the average total coverage needed by the average working adult is estimated at 10 times of your annual income. This means that if your annual salary is $45,000, you should have about $450,000 of insurance coverage from all your policies combined.
For an idea of how much insurance you need based on your liabilities and unique circumstances, do check out CPF board’s Insurance Estimator.
Where Should You Start?
A pretty good place to start would be MoneySmart’s Insurance Comparison Page for some quotes on the different types of insurance policies.
All in all, this is an excellent piece of news for all of us to help us meet our biggest financial objectives in our 20s and 30s in cost-effective ways, and for those who are older, it is never too late!
What are your thoughts on the new rulings? What else do you think needs to be done? Share your thoughts here!