The S$1.5 Trillion Chasm that Stands Between You and Peace of Mind

Singaporeans are known to be well-insured, but little do we know that we may still be grossly unprepared for life’s contingencies. And it may be our loved ones that will be shouldering the financial burden.

By most measures, Singaporeans appear to be well-protected against the vicissitudes of life.

While we were only the 16^th largest life insurance market in the world in 2022, no other country or region spent more on life policies than we did on a per capita basis except for Hong Kong. The average life insurance spending exceeded US$6,000 last year. This translates into a penetration rate of 7.4% of GDP, almost as high as the level seen in the UK. ¹

A (false) sense of security?

The average Singaporean spent US$6,000 on life insurance last year, the second highest amount globally after Hong Kong

Consumer risk awareness is also on the rise in the post-pandemic era, fuelling robust demand even as the economic outlook weakens.

Research provider GlobalData expects the life industry in the city-state to grow almost 10% a year from 2022 to 2027, taking annual premium income past the S$100 billion milestone over this time.

These statistics seem reassuring. If you are like most Singaporeans, you probably have one or more life policies in your portfolio. Inflation may have set your savings goals back a little – after all, markets have been as chaotic as ever – but it’s surely time to sit back and watch your nest egg grow, knowing that your family’s future is secure?

Not so fast.

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Are your blind spots are covered?

While we are generally adept at visualising the quality of our retirement lives and planning for those expected eventualities accordingly, we often hit a blind spot when it comes to the aftershocks of our passing, premature or otherwise. 

A survey conducted by Swiss Re shows that although four out of five Singaporeans recognised that being financially prepared for death is necessary, a mere 6% of respondents correctly identified inadequate mortality protection as high-risk.

The same survey also shows that most consumers who do realise that insufficient protection is a challenge would look to earn more and invest more, before turning to life insurance as a solution. Almost half of Singaporean respondents cited the perceived high cost of insurance as a barrier.

So which is it? Are we buying more than enough life insurance or not nearly enough?

The answer is a bit more nuanced than cursory conclusions drawn from insurance penetration and density data.

First, there is always a distribution problem with averages. The high concentration of ultra-wealthy individuals in Singapore means that industry data may be heavily skewed. Single-premium policies typically purchased by more affluent consumers accounted for roughly half of total premiums in 2022, up from just a third in 2019, according to GlobalData. 

Second, even if we already have some form of life insurance coverage, our protection needs may still exceed the resources accessible to our dependents by a wide margin, resulting in a void that may leave our families financially stranded when we are not around.

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Understanding the protection gap

A protection gap refers to a shortfall of the financial resources available to meet our dependents’ needs in the event of our illness, disability or death. The concept is particularly useful to assess untimely occurrences that may impact our families’ living standards before our long-term savings and investment objectives are reached.

Calculating your protection gap

Your protection gap is the difference between your protection needs and the dollar amount of resources available to you or your dependents, expressed in present-value terms
Looking just at the risk of our passing (and not the risk of our falling critical ill or becoming disabled), Swiss Re estimates that as of 2019: ^{3, 4}

• The mortality protection gap in Singapore was US$600 billion, or S$865 billion in 2022 terms; 
• That works out to be around US$645,000 per household, or S$930,000 in 2022 terms;

In keeping with our fondness of real estate, 16% of our mortality protection need is expected to be fulfilled by the monetisation of investment properties, followed by life insurance (15%), liquid (11%) and other financial assets (3%).

This leaves a gaping hole of 55% of funding requirement that remains unmet.

From this perspective, Singapore is in reality not that much better off than its peers when it comes to providing family financial security.

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A gaping hole

An estimated 55% of Singaporeans’ mortality protection needs are unfunded. MPG = Mortality Protection Gap. Figures in US$ billion

Source: Swiss Asia Mortality Protection Gap Survey 2019, Swiss Re Institute

What’s more, the Life Insurance Association of Singapore (LIA) estimated in a study in 2018 that our critical illness protection gap would add an extra S$538 billion to the deficiency. That is equivalent to S$590 billion in 2022 terms. ^{5, 6}

All told, Singapore has a total mortality and critical illness protection gap approaching S$1.5 trillion in today’s dollars that we have to seek to fill.

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So what can we do?

A lot, actually.

For starters, as a rule of thumb, the LIA recommends that an economically active adult should have mortality protection coverage of around 10 times their annual income. On top of that, a critical illness coverage of about 4 times annual income would be considered prudent. ⁵

The association has a nifty tool that allows you to estimate your protection gap based on a set of generic assumptions. 

For a 30-year old single working adult with no children and two dependent parents, the model calculates a mortality coverage shortfall of S$1.4 million and a critical illness protection gap of S$1.2 million. It should come as no surprise that the model suggests that a person with those characteristics top up their coverage.

Speaking of coverage, remember from earlier that every other adult in a survey said that they hesitate to buy life insurance due to (perceived) cost concerns? Depending on your personal circumstances, that perception may very well turn out to be ill-founded.

There are a plethora of options on the market to cater to your specific needs. Speak to a trusted advisor today to gain a deeper understanding of how each of the following products may help you close your protection gap and achieve peace of mind.

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