Duration of Insurance Required (Part 2)

You can read chapter 3, part 1 of our eBook here.

Lifetime Coverage

When do you need permanent insurance coverage that covers you for a lifetime?

If there is a continuous risk tendency throughout your lifetime, it is advisable to keep this area protected for life. This risk is often associated with financial impact risk, capable of causing serious financial losses throughout a lifetime and may even lead to bankruptcy.

Here are the core needs for which lifetime coverage is the top priority:


1. Medical Insurance (Hospital & Surgical [H&S])

  • To protect against complications from lifestyle diseases (such as diabetes)
  • To protect against unexpected medical expenses
  • To protect against medical inflation
  • To protect your savings and assets from being used to pay off medical bills


2. Critical Illness Insurance

  • To protect against medical expenses leakage not covered by medical insurance
  • To protect your savings and assets from being used to pay off alternative medical bills


3. Long-Term Care

  • To protect against the need for lifelong caregiving service cost
  • To protect against the need for lifelong medical professional service cost
  • To protect against unexpected medical service expenses
  • To protect against medical inflation
  • To protect your savings and assets from being used to pay off medical bills


Framework: Life

To construct the framework of each core area, it is important for you to know the exact needs and the risks you might encounter throughout your lifetime. For instance, income protection pertains to the working income during your working years. At some point, you will consider the age of achieving financial independence, and you may stop working to earn an income, relying on your savings or assets for retirement. Therefore, during your retirement years, income protection becomes irrelevant as there is no income to safeguard in the first place.

Therefore, it is important to know when you can achieve financial independence or when your dependents will stop replying on you. If you know the answer, you can then determine at what age your risk impact will diminish. Your insurance policy duration should align with this age. This, in essence, is what we term the income replacement approach in determining insurance needs.

There is another approach to life planning, commonly termed the legacy planning approach. Essentially, it involves gifting to the next generation – for example, providing specific amounts to family members in the event of death. As no one can predict the exact time and date of departure from this world, the duration for this coverage has to be a lifetime, as depicted in Figure 9 below.

As this topic is beyond the scope of this eBook, the legacy planning approach will not be elaborated here.

Figure 9: A Comparison of Temporary and Lifetime Coverage Needs for Life

Framework: Critical Illness

We apply the same concept of income protection for critical illness as we do for life planning. The key focus is on income replacement in the event of suffering from a critical illness. If a critical illness occurs, it could lead to a temporary pause in work for the next couple of years, allowing you to focus on recuperation before returning to work. During this recovery period, you would still incur daily expenses, monthly bills, and even taxes.

Another potential risk associated with critical illness is the expenditure on alternative medicines or treatments not covered under medical insurance. The rationale for having an additional layer of critical illness coverage, beyond income protection, is to cover any medical expenses leakage or costs not covered by hospital insurance. This layer of alternative treatment coverage should cover your lifetime, following the same concept of hospital and surgical risk. You may refer to Figure 10 for further details.

Figure 10: A Comparison of Temporary and Lifetime Coverage Needs for Critical Illness

Framework: Occupational Disability

We adopt the same concept of income protection for occupational disability as we do when planning for life. The key focus is on income replacement if you are unable to perform your own or any occupation, potentially resulting in permanent disability. This coverage typically extends up to 75% of your monthly income. The risk of not insuring against this possibility could render you unable to cover daily expenses, bills, taxes, and may impede your ability to save for retirement. This area of risk is particularly crucial if you are in the building phase (refer to Figure 3), where you are working towards financial independence.

Figure 11: A Comparison of Temporary and Lifetime Coverage Needs for Occupational Disability

Framework: Medical (Hospital & Surgical [H&S])

We approach this area of risk differently from the life framework. Protecting your assets in the event of medical treatment or surgery extends throughout your lifetime, as such events can occur at any time.

Even if you have retired with a substantial amount of assets, these assets could be depleted instantly if the costs of treatment are equivalent to, or worse, exceed the value of these assets. Please refer to Figure 5.

Transferring such a risk to insurance by paying a premium could help defray large medical bills, especially in the case of serious chronic diseases (e.g., requiring kidney dialysis every alternate day). Moreover, the costs and quality of medical treatment vary widely, ranging from public hospital C ward to private hospital single ward.

Figure 12: A Comparison of Temporary and Lifetime Coverage Needs for Medical [H&S]

We typically plan within the medical [H&S] framework based on each person’s healthcare concerns and expectations. Recognising that the cost of treatment at a private hospital would be higher than at a public hospital, the insurance premium follows the same logic. Hence, it is essential for you to understand your needs and the type of treatment you are seeking, whether it involves inpatient or outpatient treatments. You may refer to Figure 13 for an example of the different types of healthcare standards:

Figure 13: The Different Types of Healthcare Standards

Choosing private ward coverage does provide the most choices when seeking treatment or having a second opinion from another private hospital doctor. However, it comes with higher insurance premiums as compared to the rest of the plans.

Having an “as charged” feature in a plan means that the cost of treatment is fully covered in the event of a claim, whereas a plan with a claim limit means that some out-of-pocket expenses are required if the cost of treatment exceeds the amount claimable.

There are also instances that some treatments may not be fully transferred to insurance, and thus the financial impact could still be significant, e.g., non-cancer drug list (non-CDL) drugs. To address such areas, we follow the critical illness’ alternative treatment framework, which provides coverage for a lifetime.

Framework: Long-Term Disability

The risk within the long-term disability framework is distinct from the occupational disability framework, and this distinction is often misunderstood due to differences between the two types of risks. The primary focus of long-term disability is introducing an additional long-term cost, such as nursing homes, which can cause financial strain for family members.

Research indicates that the long-term running cost of engaging a caregiver (e.g., a helper) or enrolling in a centre-based or nursing home could range between $1,500 to $6,500 per month, depending on the level of healthcare service that you are seeking. Long-term disability or permanent disability could occur through illnesses or accidents at any point in your life. Hence, it is crucial to cover this risk for a lifetime.

Figure 14: A Comparison of Temporary and Lifetime Coverage Needs for Long-Term Disability

Case Illustration

The duration of coverage usually influences the premium outcome for insurance. To illustrate the difference in premium based on duration, let us consider the following assumptions:

  1. Male, age 40, non-smoker, working as account manager
  2. Coverage of $1,000,000 in life
  3. Using a term life policy


Figure 15: Duration of Coverage and Its Annual Premium

Figure 15 demonstrates that the longer we extend the duration, the higher the premium for the policy. Therefore, the key is to balance your needs and affordability. If the need for insurance is only until age 65 (premium $900), there is no necessity to be insured until age 99 (premium $4,452) for the same coverage of $1,000,000; otherwise, you will end up overpaying for what you do not need.

Stay tuned for chapter 4 of our eBook next week!


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