In the fast-paced landscape of Singapore, where the cost of living is constantly on the rise, making informed financial decisions is more crucial than ever. The Monetary Authority of Singapore (MAS), alongside the Association of Banks in Singapore (ABS), Association of Financial Advisers (Singapore) (AFAS), and Life Insurance Association (LIA), has introduced a Basic Financial Planning Guide 2024, aimed at empowering Singaporeans to enhance their financial well-being.

A highlight from the guide is the recommended insurance budgeting strategy—advising Singaporeans to allocate no more than 15% of their income towards insurance protection. While it sets the ceiling at 15%, we argue that a target of 10% is more practical and sufficient for most individuals. Here’s why:

DTF recommends: The 10% insurance budget Sweet Spot

1. Balancing Needs and Affordability: Allocating 10% of your income towards insurance strikes the right balance between being adequately insured and not overburdening your financial resources. This allows you to address other critical areas of financial planning, such as savings, investments, and debt repayment.

2. Adequate Coverage Without Overinsurance: A common pitfall for many is the risk of overinsurance—where the insurance premiums eclipse the actual coverage needs. By keeping to a 10% budget, you’re more likely to tailor your insurance purchases to your actual needs, avoiding unnecessary costs.

3. Focusing on Coverage, Not Wealth Accumulation: Staying within a 10% insurance budget encourages you to prioritize policies that offer essential coverage rather than those with investment components aimed at wealth accumulation. This approach ensures your premiums are directed towards protecting yourself and your loved ones, rather than being diluted across investment channels that may not align with your immediate coverage needs.

A real-world case study

Consider Jane, a 30 yr old typical Singaporean professional earning S$5,000 a month, after CPF deduction, her take-home pay is $4,000.

According to the guideline, spending 15% of her income would mean S$600 a month on insurance premiums.

Here’s how her ideal coverage would look like based on MAS recommendation:

• Ideal Death Coverage (9x of annual income): $540,000
• Ideal Critical illness Coverage (4x of annual income): $240,000

How her insurance premium may look like

Coverage	Description	Premium
Hospital Plan	Private hospital. 5% co-insurance, capped at $3,000	$904.62 per year $238.36 per year (if public)
Whole life plan	$100,000 Death $100,000 Early Critical Illness $100,000 Disability	$1,950 per year $4,632 per year (for $240,000)
CI Term plan	$140,000 Early Critical illness Allows for multiple claim across different CI group	$1,362 per year $2,335 (for $240,000 coverage)
Term Life	$440,000 Death $440,000 Disability	$444.40 per year

With the chosen insurance plans, Jane achieves comprehensive coverage at just $388.40 per month—40% less than the recommended guideline. Opting for public hospital coverage and a term plan for critical illness can further reduce her monthly cost to $253.

Jane’s situation is not an exception. In the vast majority of cases we’ve reviewed, health insurance expenses seldom breach the 15% cap. However, we’ve observed instances where financial advisors have pushed for the maximum 15% spend without valid justification.

When does a 15% budget make sense?

There are certain scenarios that would warrant a 15% budget. Here are more detailed explanations for each scenario:

1. You are paying for your dependents’ insurance:

When you’re responsible for not just your own insurance but also that of your dependents—be it your parents, children, or both—the financial dynamics change significantly. Insurance for dependents often includes health coverage, critical illness, or even education and life insurance for children. As these individuals may not have an income of their own or sufficient savings to cover potential medical expenses, it becomes the breadwinner’s responsibility to ensure they are adequately protected. This might necessitate allocating a higher portion of your income, possibly up to 15%, to cover the cumulative insurance premiums for the entire family, ensuring everyone’s needs are met without compromising on essential coverage.

2. You have some pre-existing conditions:

Pre-existing medical conditions are a critical factor in determining insurance premiums and coverage options. If you have a chronic condition or a history of health issues, insurance providers may consider you a higher risk, leading to higher premiums for the same level of coverage. In some cases, you might need to purchase additional riders or a more comprehensive plan to ensure that your specific health needs are adequately covered. This can result in spending a larger portion of your income, potentially up to 15%, on insurance. However, this ensures that you have access to the necessary medical care without bearing the full financial burden out-of-pocket, especially since treatments for chronic conditions can be long-term and costly.

3. You want more coverage than recommended:

There are scenarios where you might choose to secure more insurance coverage than the standard recommendations suggest. This could be driven by a desire to leave a substantial legacy for your dependents, cover potential liabilities (like mortgages or loans that would burden your family in the event of your untimely passing), or simply because you prefer the peace of mind that comes with having extensive coverage. This is particularly relevant for individuals with significant financial responsibilities or those who aspire to provide a certain lifestyle or financial security for their loved ones after they’re gone. Opting for higher coverage amounts can indeed require a higher investment in insurance premiums, making it reasonable to allocate up to 15% of your income towards insurance in these instances. This approach ensures that your financial planning aligns with your personal values, goals, and the legacy you wish to create.

The Bottom Line

The key to effective financial planning, particularly when it comes to insurance, lies in finding a balance that suits your personal and family’s needs without compromising other financial goals. While the MAS guideline sets a maximum, we believe aiming for the 10% mark on insurance spending is not only adequate but advisable for most. It ensures you are protected against life’s uncertainties, while also preserving your ability to save, invest, and enjoy life’s pleasures.

Navigating through the options and finding what’s best can be daunting, but remember, the goal is financial security and peace of mind—not just for today but for the future.