It's a taboo subject, but one that Singaporeans must come to terms with sooner rather than later.
A recent study by the National Technological University (NTU) on the extent of under-insurance in Singapore substantiated what the life insurance industry has sensed all along: that the average Singaporean is under-insured by as much as a whopping 75 per cent of what his dependants actually need in the unfortunate event of his early death.
The NTU study determined that the average adult earning about $42,000 a year would need approximately $480,000 - or just over 11 times his annual income - to cover the mid to long-term financial needs of his dependants should he pass on prematurely. In reality, the average adult Singaporean is covered for only $118,000, which makes up only 25 per cent of his dependants' needs.
In a separate consumer survey commissioned by the Life Insurance Association (LIA) to ascertain Singaporeans' attitude towards insurance protection, findings revealed that this shortfall in Singaporeans' insurance needs was matched by an indifference towards getting additional coverage.
How do we explain this gross under-insurance and the accompanying apathy of Singaporeans? Perhaps this could be attributed largely to the misconceptions held by consumers of the purpose and function of insurance.
Insurance products as savings instruments
In Singapore, an insurance policy is usually deemed as both a savings and protection instrument. This means that with a single insurance plan, consumers can conveniently achieve the dual purpose of setting aside part of their surplus cash regularly for their long-term objectives such as retirement, and at the same time give themselves some insurance coverage against death.
After 20 to 30 years, if death doesn't occur, the premiums that policyholders have paid are not 'wasted'. Not only do they get back all their premiums, they are also entitled to the investment returns that the plan would have generated; usually at an average rate of three to five per cent per annum.
This explains the popularity of insurance products such as endowment plans that help to save for specific shorter-term financial objectives, such as children's university education, and investment-linked policies (ILPs), which provide consumers direct exposure to investment markets.
Insurance planning done in isolation
Over time, this approach to the way insurance products are distributed and bought in Singapore may have prompted consumers to perceive insurance quite differently from its fundamental purpose as a risk management tool within the overall financial planning process.
To put it simply, financial planning involves helping individuals or couples to achieve specific financial goals such as retirement or funding for their children's tertiary education. This is achieved through doing a detailed financial analysis, which will enable them to figure out how much they need to save and invest in order to reach these goals.
A good financial plan must ensure that even in the worst-case scenario, such as upon the demise of the breadwinner, these goals must somehow still be achievable for the surviving dependants. Adequate insurance payout in this case, will, in a way, help to replace the amount the breadwinner was saving and investing from his income towards these goals. Hence, the 'risk' of his death should be sufficiently taken care of through the insurance coverage.
Buying an insurance product, without first setting one's financial goals, is poor planning - you probably wouldn't know how much coverage you need and thus would likely be under-insured.
Insurance coverage based on affordability
If the more pressing objective of purchasing an insurance policy is to 'force' one to be disciplined and start putting aside some surplus cash every month, then naturally the protection amount becomes of secondary importance and is reduced to a matter of how much the consumer wishes to save regularly. So, for example, if all I want to save for the moment is $200 a month, then my coverage will be largely determined by this monthly premium (as well as other underwriting factors such as my age and medical history of course).
While it is clearly desirable to save, it would be more appropriate for one to calculate their protection needs first, budget the monetary resources for this purpose and then use whatever surplus cash for investment.
A term plan that provides coverage for a 30-year old non-smoking male in good health till he is 65 years of age costs less than $100 a month for S$350,000 of insurance; which on average should be a small proportion of one's monthly income. Typically, such term plans are at least 60 to 70 per cent cheaper than an insurance-cum-savings plan. Essentially, one pays only for the protection coverage so the premiums are not considered as savings but as an expense.
Also, term plans being unbundled offer the pure protection that's needed at an affordable amount.
But how ready are consumers, assuming they are the typical average Singaporean adult, to pay this premium every month for 35 years (which would amount to $42,000, with potential interest not included) without getting any money in return at the end of it all if they don't see this coverage as something they must have?
This is exactly this mentality which led to the state of underinsured Singaporeans.
Insurance premiums: a 'waste' of resources?
Unfortunately, since most consumers are 'savings-oriented' when it comes to purchasing insurance, the prevalent mindset of policyholders would be to look forward to receiving the lump sum amount when their policy matures.
This does not augur well for term insurance plans which are pure protection plans that offers high payout at very low cost because there is no savings component in such term plans.
But because many consumers are intent on getting back the money they've put in, many tend to think that paying for a product and not getting your money back when you don't 'use' it is a sheer waste of money even though they are paying a lot less.
Aiming to narrow the under-insurance gap
With all these misconceptions, the challenge of a qualified financial planner is therefore not just to assess the risks and protection needs of consumers by analysing their current financial situation and determining how much they need to provide for their dependants.
There is also a need for them to re-educate consumers on the purpose of insurance and help them recognise it as a risk management tool.
Seeking quality financial advice is key and it is crucial for anyone who wants to start financial planning to have an open discussion with an adviser.
Consumers too have a part to play. They must be more willing to accept insurance as a way to transfer their financial risks over to the insurance company. It is a responsibility for those with dependants to put in place contingency plans for worst-case scenarios such as death.
Of course, some people would argue that dependants can always adjust their lifestyle to a more subsistence level according to the household income available. But the whole idea of planning in the very first place is to ensure that one's dependants are not left in the lurch and having to adjust to a drastic lifestyle change during this period of great emotional turmoil. The onus is still on the breadwinner to plan responsibly.
But because insurance doesn't benefit the life assured directly, it is indeed tough to weigh the intangible benefits that it provides, such as the much-espoused 'peace of mind'.
One way to get around this is to meet with a financial consultant as a couple, and plan together. For a spouse, especially a non-working spouse, the knowledge that his or her partner is taking steps to seriously ensure that their lives can go on normally even in the event of the other half's unfortunate death provides great comfort and assurance.
While no one enjoys entertaining negative thoughts such as death, it doesn't mean one should ignore planning for it. Certainly no one can determine its timing but one can ease or even eliminate the disastrous financial impact that death can bring.
Perception of Risk
In a nutshell, how we perceive insurance is actually a function of how we perceive risks.
To think that undesirable events such as premature death are unlikely to happen to us, and therefore not necessary to plan for it, is, quite simply, unwise.
To use an analogy, a person learning how to roller-blade would not exclude buying a helmet, shoulder and knee pads just so that he or she will have more money to purchase an even better pair of roller-blades. If the learner (for some miraculous reason) doesn't fall and hurt himself, he will probably not begrudge having spent money on these safety accessories.
Likewise, money spent on 'outsourcing' huge financial risks is not 'wasted'. On the contrary, it reduces uncertainty and improves the standard of living.
Life is about taking calculated risks and insurance has a crucial role to play in mitigating these risks in our financial plans.
Life is all about changes and being prepared. While we cannot plan for life, we can certainly plan for living.
The writer is the Vice President of the Life Insurance Association and Chief Executive Officer of AXA Life Insurance Singapore.
