Your protection gap is the estimated difference between your protection needs and the combined amount of your total savings (including CPF savings) and existing insurance coverage. When you have a protection gap, it means you may not have sufficient insurance coverage for you or your dependents to pay for expenses and continue at the same standard of living if anything happens to you.
For the underinsured, this means that dependent family members, especially young children, spouses and elderly parents, may not be able to continue their current lifestyles without your income. For insurers, this not only means a lower client base, but they are also unable to apply an optimal level of risk pooling for its clients.
There are two main forms of protection gaps an individual may face – mortality protection gap and critical illness protection gap.
Mortality protection gap
Mortality protection gap is defined as your financial gap to cover the needs of your dependents over a defined period in the unfortunate event of your death. According to LIA, the mortality protection gap in Singapore is estimated to be nearly $355 billion, or 2.1X annual income, as at 31 December 2016.
In the event you are no longer around, you want your dependents to be able to continue living similar lifestyles, and not have to worry about the debt and financial commitments left behind.
Critical illness protection gap
Critical illness protection gap is defined as your financial gap to cover the needs of your dependent as well as yourself, assuming a critical illness recovery period of five years. According to LIA, the critical illness protection gap in Singapore is estimated to be nearly $538 billion, or 3.1X annual income, as at 31 December 2016.
In the event that you are diagnosed with a critical illness, you will unlikely be able to work but still retain all your financial commitments. Further, you may even have to incur additional expenses, such as healthcare costs, a domestic helper as well as other related costs. Covering your critical illness gap will enable you to replace your income and focus on recovering with peace of mind rather than stress over your financial obligations at a crucial time.
LIA defines your insurance protection needs in three broad categories.
(1) On-going expenses for dependents
This includes expenses for your children, including basic living necessities, education, allowance, entertainment and others. Expenses for your spouse and other adults, including basic living necessities and others. Expenses for your elderly parents, including basic living necessities, allowance, healthcare and others.
(2) Personal and housing loans
This includes your personal and housing loans, as well as any other debt that you will be leaving behind, including credit card debt or motor loans, which your surviving household members may be liable for.
(3) Additional expenses
This includes your funeral expenses (in such a scenario) as well as any unpaid services your dependents will need to incur in the future, such as hiring a domestic worker.
In the scenario you are diagnosed with a critical illness that prevents you from working, an additional consideration for your basic living necessities and other relevant expenses need to be taken into consideration.
Carrying a substantial protection gap is a big risk, as you could be jeopardising your, and your family's, financial futures if you do not have sufficient funds to tide through a sudden loss in your income.
