Do I have a protection gap?
Key Takeaways:
1. As you reach different milestones in life, your needs change. These are opportunities to examine your protection gap and consider what insurance plans you need to get or update.
2. From getting a job for the first time to starting a family to retiring, there are insurance plans available to meet your needs at every stage. Find out what these are and how they can benefit you.
3. Bridging the protection gap is essential to living prepared, recovering from loss, and minimizing risk for you and your loved ones.
What is the protection gap?
The protection gap is not a standardised or regulated term. It is generally defined as the difference between the amount of capital you may need versus the amount you have available when an unfortunate event occurs.
Examples of such events include critical illnesses, death, disability, retrenchment, or retirement. Singapore residents have a mortality protection gap of 2.1x of annual income and a critical illness protection gap of 3.1x of annual income1 (Life Insurance Association of Singapore, 2017).
How do I calculate my protection gap?
Your protection gap, can be calculated as follows:
From the date of the unfortunate event occurring, the protection gap can be expressed as such:
Protection Gap = [The resources you have available] – [All future resources and expenses needed]
If this number is positive or zero, you may be sufficiently insured. However, if this number is negative, you might have a protection gap.
Here are multiple examples and illustrations of the protection gap for mortality and critical illness:
Protection gap example: mortality and life insurance
Example Scenario: Mr and Mrs Chan are currently 30 years old, and both are working. They have two children aged 0 and 1. If Mr Chan passes away, the burden of being a sole breadwinner will fall on Mrs Chan. Depending on Mr Chan’s insurance policies and life savings, his dependents may have a less than comfortable life.
First, the Chan family’s available resources over the next 35 years may look like the following:
| Resources Available | Amount | Derivation |
|---|---|---|
| Mrs Chan salary (take-home pay) until age 65 | $3,000,000* | 35 years multiplied by S$85,000 per annum |
| Current combined savings | $250,000 | This value is highly variable for specific circumstances. |
| Total | $3,250,000 |
*This figure is rounded up to the nearest million.
Second, the family’s net resources needed going forward for 35 years may look like the following:
| Resources Needed | Amount (These values are highly variable to specific circumstances) |
|---|---|
| Mortgage remaining | $600,000 |
| Children’s expenses until age 21 | $500,000 |
| Household help needed | $400,000 |
| Household expenses (food, clothing, transport) | $3,000,000 |
| Total | $4,500,000 |
In this case, Mr Chan’s protection gap is approximately $1,250,000. Life insurance may help bridge this gap.
Protection gap example: acquiring a critical illness
Example Scenario: Mr and Mrs Alif are currently 30 years old, and both are working. They have two children aged 0 and 1. Mr Alif, who works in construction as a builder, fell seriously ill and as a result become severely handicapped and can no longer support heavy loads. As he is no longer able to work, he will have to depend on his savings and spouse. The doctors have informed him that it will take five years to recover. To speed up recuperation, he must go for numerous medical check-ups and physiotherapy treatments regularly.
First, the Alif family’s available resources in the next 35 years could look like this:
| Resources Available | Amount | Derivation |
|---|---|---|
| Mr Alif's salary (take-home pay) until age 65 | $1,600,000* | 30 years multiplied by S$53,333 per annum. 5-year career break due to injury. |
| Mrs Alif's salary (take-home pay) until age 65 | $3,000,000* | 35 years multiplied by* S$85,000 per annum. |
| Current combined savings | $250,000 | This value is highly variable to specific circumstances. |
| Total | $4,850,000 |
* This figure is rounded up to the nearest million.
Second, the Alif family’s net resources needed in the next 35 years could look like the following:
| Resources Needed | Amount (These values is highly variable to specific circumstances.) |
|---|---|
| Physiotherapy and home care nursing needs | $120,000 |
| Mortgage remaining | $600,000 |
| 2x children’s expenses until age 21 | $500,000 |
| Household help needed (higher due to Mr Alif's disability) | $500,000 |
| Household expenses (food, clothing, transport) | $4,000,000 |
| Total | $5,720,000 |
Here, the protection gap is approximately $870,000. In this case, the Alif family may consider critical illness insurance at a value of $870,000 to bridge this gap.
Other considerations
The above examples may be overly simplistic, but they are provided as a guide to think about what protection gaps you may have. As you reach different milestones in life, it is a good practice to review your protection gap diligently.
It is recommended that you discuss them with a trusted financial advisor in detail. A financial advisor may be able to point out other minutiae that could have a large impact. These might include the effects of inflation, the possibility of another illness or prolonged medical costs impacting either you or your spouse, or even the stability of the remaining spouse’s career.
Disclaimers
1. Life Insurance Association of Singapore. (2017). LIA Singapore Protection Gap Study. Singapore: Life Insurance Association of Singapore.
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