Death is a topic that many people avoid discussing, but it is a reality that we all must face.
While we cannot predict when our time will come, we can prepare for it by ensuring we have sufficient funds left behind for our loved ones to care for themselves after our passing.
This is often done through life insurance. But how much life insurance do you really need?
This is a common question that many people in Singapore ask themselves when considering life insurance.
The answer is not always straightforward, as it depends on factors such as age, life stage, income, and financial obligations.
However, by understanding these factors and doing some calculations, you can determine the appropriate amount of coverage for your needs.
In this article, we will explore the factors determining how much life insurance you need in Singapore and provide a guide to help you make an informed decision.
Keep reading.
How much life insurance do I need in Singapore?
You will need life insurance coverage of an average of 9X to 10X of your income in Singapore, according to the 2017 Life Insurance Association (LIA) Singapore Protection Gap Study.
This is also the amount that most insurance agents and financial advisors recommend when helping you determine how much life insurance coverage you’ll need.
But in actual fact, the amount you need depends on many factors, which I will cover later. It could be more than the guidelines provided by the LIA, but it’s often less than this.
Thus, it’s essential for you to understand how to calculate your protection gap and, most importantly, understand the purpose of why you’re buying life insurance.
What is the purpose of life insurance?
The purpose of life insurance is to provide financial protection to your loved ones in the event of your unexpected death.
Life insurance can help your family pay for expenses such as funeral costs, outstanding debts, and living expenses.
It also provides a source of income for your family to maintain their standard of living and achieve their financial goals.
Additionally, life insurance can be used to leave a legacy or provide for a favourite charity – but that’s beyond the scope of this article.
As you can see, without life insurance, your loved ones may be left struggling to make ends meet during an already difficult time.
Thus, getting life insurance coverage, also known as death coverage, ensures that your dependents are cared for even long after you’re gone.
Factors to consider when determining calculating how much life insurance
Now that you understand the purpose of life insurance, the next step is to figure out what goes into calculating how much death coverage you’ll need.
These factors are mainly based on the 2017 Protection Gap Study by LIA; but the Dollar Bureau team and our partnered financial advisors added some extra considerations based on our experience helping others.
Rent
When calculating how much life insurance you need, it’s important to consider your rent payments.
If you were to pass away, your loved ones would still need a place to live and the cost of rent can add up quickly.
Consider how much your monthly rent is and multiply it by the number of months or years you want your life insurance to cover.
This will give you a rough estimate of the amount of coverage you should have to ensure your loved ones can continue to afford their living expenses.
It’s also important to factor in any potential increases in rent over time and adjust your coverage accordingly.
Keep in mind that if you own your home, you may still need to factor in property taxes and other expenses associated with maintaining the home.
Housing Loan
When calculating how much death insurance you need, it’s important to consider any outstanding housing loans.
If you were to pass away unexpectedly, your loved ones would be responsible for paying off the remainder of your mortgage.
Calculate the remaining amount of your mortgage to determine how much coverage you need for your housing loan.
This will give you a baseline for how much life insurance coverage you should consider.
It’s also important to consider the length of your mortgage and the type of loan you’re taking.
If you took a fixed-interest loan, it’s easier to calculate this.
For those on a floating rate, do factor in inflation, which will increase interest rates.
It might be better to assume you take up a fixed-interest loan, making calculations easier.
Thus, if you have a 30-year mortgage, you may want to consider a policy that will provide coverage for at least that length of time.
Future Household Expenses
Next, you need to consider your current household expenses and factor in inflation.
This means taking into account the rising cost of goods and services over time and how it will affect your expenses in the future.
Start by listing out all of your current monthly expenses, including utilities, groceries, transportation, and any other bills you pay on a monthly basis.
Then, factor in how much you expect these expenses to increase over the years due to inflation.
One way to estimate inflation is to use Singapore’s historical average inflation rate, which is around 2%, but I’d use 3% to play it safe.
For example, if your current monthly expenses are $5,000, you can estimate that they will increase to $6,500 in 10 years and $8,500 in 20 years due to inflation.
Based on your current and future expenses, you can determine how much life insurance your family will need if you suddenly pass away.
Your Elderly Parents
If you are financially responsible for your parents, you may want to factor in their expenses and potential medical costs.
Consider how much support your parents will need in the future, including any long-term care or medical expenses.
It’s best to start by determining if your parents already have Eldershield upgrades or CareShield Life supplements, as they are designed to include in their long-term care.
You can then check for any shield plans or critical illness insurance plans they might have, as these will play a huge part in offsetting additional death coverage you might need.
Some would recommend including your parent’s life insurance coverage, but Dollar Bureau’s partners and I agree that it only makes sense to consider a whole life policy, not a term plan.
Should you pass on, a whole life policy has a cash value that your parents can surrender and use to pay for their needs.
A term plan mostly expires when they reach 75 years old, below Singapore’s average lifespan of 87.
Children Needs
When calculating how much life insurance you need, it is important to consider your children’s needs.
When determining the amount of life insurance needed for your children, consider their age and the number of years until they reach adulthood.
If you have young children, you may need a larger policy to provide for them until they can support themselves financially.
You should also consider any special needs your children may have.
If your child has a disability or medical condition requiring ongoing care, you may need to factor in additional medical expenses and specialised care costs.
Another factor to consider is the cost of education. University tuition fees and other expenses can be a significant financial burden for families.
Consider the cost of education for each child and factor that into the amount of life insurance you need.
Alternatively, to better prepare for your child’s education, you may consider an endowment plan, such as the Singlife Choice Saver, as you can ensure it will mature exactly when your child needs it.
For those without kids yet, you can choose to factor these costs once you have more information on how much you need.
You can always cover the gap later in life instead of purchasing a larger amount now.
Funeral Costs
One important factor to consider when calculating how much life insurance you need is the cost of a funeral.
Funerals can be expensive, with the average cost ranging from $7,000 to $10,000.
This cost includes services such as embalming, casket, funeral home fees, and other related expenses.
It’s important to factor in these costs to ensure that your loved ones are not burdened with the financial responsibility of your funeral.
Consider the type of funeral you want and any cultural or religious practices that may impact the cost.
You may also want to consider pre-planning your funeral to lock in current prices and ease the burden on your loved ones.
When determining how much life insurance you need to cover funeral costs, it’s important to factor in inflation and the potential for rising costs in the future.
It’s better to overestimate than to leave your loved ones with unexpected expenses.
Household Helper
If you’re the sole breadwinner for your family, this factor wouldn’t matter much because you would’ve already included future household expenses in your calculations.
However, most families in Singapore are dual-income, so your calculations are probably based on just 1 person – yourself.
To continue providing for your family, your spouse must still continue working.
If your spouse needs someone to help with household chores such as cleaning, cooking, or childcare, this could have a significant financial impact on your family.
To determine how much coverage you need, consider the cost of hiring a household helper. This may include the cost of training, salary, benefits, and taxes.
It’s also important to consider the length of time needed.
If the household helper is only responsible for childcare, you may need coverage until your children are grown and no longer require a caregiver.
Keep in mind that the cost of a helper may increase over time due to inflation, so it’s important to factor in future costs when determining your life insurance needs.
Other Loans
When calculating how much life insurance you need, it’s important to consider other loans you may have apart from your mortgage.
This includes car loans, student loans, credit card debts, and other outstanding debts.
If something were to happen to you, your loved ones would be responsible for paying off these loans.
When determining how much coverage you need for other loans, consider the remaining balance and the loan length.
You want to ensure that your life insurance policy can cover the full amount of the loan and any interest that may accrue over the period of time.
By including other loans apart from your mortgage when calculating how much life insurance you need, you can ensure that your loved ones are financially protected in the event of your unexpected passing.
CPF Savings
Alright, every previous factor before this adds to the total coverage you’ll need.
But from this factor onwards, you should deduct what you have from your total count.
One of the first and most important factors to deduct is your total CPF savings – including your CPF Ordinary Account (OA), CPF Special Account (SA), and Medisave Account (MA).
This also means any CPF investments you’ve made.
Make sure that you’ve already made your CPF Nomination so that your beneficiaries can receive your CPF monies quickly. Otherwise, it might take up to 6 months.
Other Savings & Investments
When calculating how much life insurance you need, it’s important to consider your other savings apart from CPF.
This includes any emergency funds, retirement accounts, SRS accounts, and investments.
These savings can help provide financial support for your loved ones after you pass away, which may decrease the amount of life insurance you need.
If you have significant savings, you may not need as much life insurance as someone with little to no savings.
However, it’s important to remember that your savings may not be easily accessible to your family in the event of your death.
So it’s best to ensure you have liquid cash that your family members can tap into before the remainder of your savings can be accessed.
Current Insurance Protection
When determining how much life insurance you need, it’s important to consider any current insurance protection you may already have.
This can include employer-provided term insurance, group policies, and any personal life insurance policies you may have already purchased.
Consider the death benefits (if any) from your endowment plans, annuities, and ILPs.
Don’t forget the Dependents’ Protection Scheme (DPS) policy if you have one!
This will help in reducing the total coverage you’ll need.
Knowing your current coverage will help you determine how much additional coverage you may need to adequately protect your loved ones in the event of your untimely death.
Keep in mind that your current insurance protection may not be enough to cover all of your financial obligations and provide for your family’s future needs, especially if your circumstances have changed since you first purchased your policies.
Inheritance From Your Parents
When calculating how much life insurance you need, it’s important to consider any potential inheritance you may receive from your parents.
This can include cash, property, or investments that may impact your financial situation in the future.
If you expect to receive a significant inheritance, you may be able to lower the amount of life insurance you need.
However, it’s important to remember that inheritance is not guaranteed and should not be relied upon as the sole source of financial security.
Consider factors such as your parents’ age, health, and financial situation when estimating the potential inheritance you may receive.
It’s also important to have open and honest conversations with your parents about their estate planning to ensure you have a realistic understanding of what you may inherit.
From here, you can adjust how much you’ll need to get in death coverage.
Income increments
When it comes to determining how much life insurance you need in Singapore, income increments can play a significant role in your decision-making process.
As your income increases, you may find that you can save more money, which can help you better prepare for unexpected events that may require life insurance coverage.
Higher salaries due to promotions or yearly raises can also increase your CPF savings, further boosting your financial security.
In addition to these benefits, income increments can lead to more cash savings and investment opportunities, which can help you build a more robust financial safety net.
However, you must ensure that income increments don’t come with lifestyle inflation.
If you’re earning more and spending more than what you’re spending now, you might want to get your coverage reviewed consistently.
Otherwise, you can factor in lifestyle inflation by factoring in a higher inflation rate when calculating your future expenses.
How to calculate your life insurance coverage gap?
To calculate your gap in life insurance coverage, you’ll need to add up all of your current and expected future expenses, and then deduct any existing life insurance policies or savings you have.
Here are the factors you’ll need to add up (A to H) and deduct (I to M) to determine your protection needs:
- Rent or mortgage
- Housing loan
- Future household expenses
- Elderly parents
- Children’s needs
- Funeral costs
- Household helper
- Other loans
- CPF savings
- Other savings and investments
- Current death coverage
- Inheritance from parents
- Income increments
This will give you a rough guideline of your current life insurance coverage debt. However, the list may not be comprehensive for everyone as everyone has their own financial situation.
Thus, as a rule of thumb, I would recommend factoring all other current and future expenses before deducting all current and future assets not listed in the list.
Our partners have done life insurance calculation gaps plenty of times, and I believe a good financial advisor can help you with this too.
How to bridge the life insurance coverage gap?
The cheapest and easiest way to bridge the life insurance coverage gap is to reduce current and expected future expenses.
Based on factors A to H in the previous section, look for ways to minimise your current and future expenses. This means opting for a lower-priced rent, living a more frugal life, or reducing the total amount of loans you take.
An alternate way, which is slightly more challenging, would be to increase your savings and investments, but this is tough given Singapore’s rising cost of living.
Factors I to M are also dependent on your salary, which you have no direct control over.
Obviously, both reducing expenses and increasing income might be a big challenge for most Singaporeans.
Thus, increasing your life insurance coverage is the next cheapest and easiest way.
Firstly, you could increase your current life insurance policy to match the recommended coverage amount.
Alternatively, you could purchase a separate policy to supplement your existing coverage. Another option is to consider a combination of both approaches.
It’s important to review your coverage regularly to ensure that it continues to meet your needs and bridge any coverage gaps that may arise.
Likewise, reviewing regularly lets you reduce the unneeded sum assured by reducing them or surrendering current policies.
Should you need to get more coverage, there are 2 types of life insurance policies that many use to bridge the death coverage – term life insurance and whole life insurance – which I’ll cover more in a bit.
Term life insurance
Let’s first talk about term insurance plans.
If you currently don’t have any form of life coverage, then term plans are the cheapest and easiest way to get yourself covered for death and even early critical illness and critical illnesses.
A term plan such as the China Taiping iProtect can cost as low as $43.05/month for $500,000 sum assured for 30-year-old non-smoking males up to 70 years old.
If you’re younger, opting for a lower sum assured, or choose lower premiums after comparing prices, the premiums can drop even lower than this!
Similarly, if you want to boost your existing life insurance coverage, a term plan can do it cheaply for you.
Qualify for the MINDEF/MHA Group Term Plan?
A $500,000 sum assured for 30-year-old non-smoking males up to 65 years old only costs $12.50/month!
The best part about term plans is that you can choose a renewable term plan, which lets you renew (or cancel) your policy every few years for extremely low premiums.
This is perfect for temporary cover if you find yourself having increased liabilities – such as a car loan, or if you just purchased a house.
If a term plan is what you’re looking for, here’s how to choose a term plan.
Whole life insurance
The next way to do it is through a whole life insurance plan.
Unlike a term plan, a whole life insurance policy covers your entire life (or up to 99) and gives you cash value when you surrender your policy.
Think of it as insurance bundled with a low-medium risk investment in a single policy.
You can opt to pay premiums for the policy for a limited time only (called limited pay), usually for up to 25 years.
Most term plans, with the exception of HSBC Life Term Protector, require you to continue paying until the end of the policy term, which will require you to pay for a longer period.
Because of these, whole life plans come with higher premiums.
Whole life plans are best for those looking to get some money back after years of paying premiums and for those looking to have an additional source of retirement funds apart from their CPF and investments.
Here’s how to choose a whole life insurance plan.
Investing
Speaking of investments, I know I mentioned that investing would be a tougher choice and more expensive option, but it’s hard to rule it out as your investment will grow in value, reducing your coverage gap.
Instead of a regular investment, I recommend considering an investment-focused investment-linked policy (ILP).
An ILP is an investment policy insurance companies offer to help you invest your money.
Unlike investing by yourself, an ILP gives you access to institutional-level funds that come with higher potential returns and lower fees than retail investments.
Most importantly, a good ILP such as the Manulife InvestReady III ensures that your death benefit is at least 101% of your investment.
So in the event of your passing, the Manulife InvestReady III will give you minimally get all your investments back.
A DIY investor might lose their capital in a market crash should they pass on. Even if you don’t DIY, you will still lose capital if you opt for robo advisors.
Thus, an ILP is the safer choice when talking about life insurance coverage.
However, with all investments, you must ensure that your investment grows at an annualised rate higher than the inflation rate; otherwise, you’re losing purchasing power.
Conclusion
I hope this post has made clear the importance of life insurance, how you can calculate your protection needs, and find ways to fill the gap.
If you need help calculating how much coverage you need or looking for advice on the best ways to bridge this gap, I recommend talking to a trustworthy financial advisor.
Dollar Bureau partners with unbiased and experienced financial advisors to help you with this.
