In October 2023, The Monetary Authority of Singapore (MAS), in conjunction with the Association of Banks in Singapore (ABS), the Associate of Financial Advisers (Singapore) (AFAS), and the Life Insurance Association (LIA), launched a Basic Financial Planning Guide to help Singaporeans take steps to enhance their financial well-being.

The guide outlines a few rules of thumb for individuals to start taking proactive steps to address their savings, insurance, and investment needs. By using these rules, individuals can now easily calculate how much they need for their insurance coverage amount.

From January 2024 onwards, the guide will be expanded to customise the format to meet the needs of individuals at different life stages, including fresh graduates entering the workforce, working adults with young children, working adults supporting aged parents, and pre-retirees. This makes the guide more targeted and relevant to everyone.

The question is – Is this rule of thumb meant for everyone? Using it can serve as a quick way to check if one is over-insured or under-insured.

Example 1:

• Peter is the sole breadwinner in the family.
• He is a working professional earning $100,000 per year with two young children.
• He has insurance plans which insure $500,000 in death coverage and $100,000 in critical illness coverage.
• Using the rule of thumb, let us refer to Table 1.

Table 1: Calculating Insurance Gaps

In this case, Peter has a shortfall of $400,000 in death and disability coverage and a $300,000 shortfall in critical illness coverage.

At Havend, we believe that everyone’s financial situation and financial goals are different. Therefore, by using our Capital and Income Needs Approach (CINA), we can better determine the insurance needs required for our clients. Using the same example, along with additional financial information, we can more accurately identify Peter’s insurance gaps.

Example 2:

• Peter is the sole breadwinner in the family.
• He is a working professional earning $100,000 per year with two young children.
• He has insurance plans which insure $500,000 in death coverage and $100,000 in critical illness coverage.
• Peter has total assets of $500,000, $800,000 in mortgage liability, and a $50,000 vehicle loan.
• Peter wishes to replace his family income of $50,000 per year for the next 20 years, until his children become independent and start working.
• Additionally, Peter wishes to fund both his children’s education fund (funding for local universities).

Table 2: Calculation of Deaths & Disability Needs

In the above examples, CINA uses a more in-depth method to calculate the exact needs of individuals based on their existing assets, liabilities, and even their financial obligations to the family (e.g. child’s education fund). This approach helps our client better understand their current financial position in the event of premature death.

This understanding is crucial because purchasing an insurance plan without fully comprehending their existing financial position can lead to either being under-insured or over-insured, each with distinctly different consequences.

Here are some examples of these repercussions:

Table 3: Examples of Repercussions for Under-Insured and Over-Insured Situations

At Havend, we are more mindful when it comes to insurance planning, as we view insurance as an expense. We firmly believe that we should buy as much insurance as possible while paying as little as we can.

In summary, having a rule-of-thumb guide is beneficial for individuals who prefer a “DIY” approach or wish to initiate discussions with their trusted adviser for professional advice on insurance planning. It’s advisable to review insurance needs with every life stage change or financial adjustment to ensure appropriate coverage.

If you are unsure, feel free to approach us for a complimentary InsureWell Assessment. We promise to tell you if you have enough insurance and if that is the case, you need not purchase any insurance from us.

This is an original article written by Mike Zhang, Lead, Insurance Specialist at Havend.

At Havend, if we are found to have oversold you, we have put in place a Money Back Guarantee (MBG) scheme, so you can trust that we will always prioritise your interests first. Unprecedented in Singapore, learn more about our Money Back Guarantee scheme here.