Insurance: How Much Should I Be Spending on Insurance?

How much should I be spending on insurance? This is a common question we face on our personal finance journey, and one which does not seem to have clear answers. But this is not uncommon in personal finance, which is rife with rules of thumb that do not have a clear rationale. Ask a financial advisor, or an Insurance Agent, and the answer is usually somewhere along the lines of 10% of your income. Which can come to a considerable amount! And when we delve deeper into the insurance products being spent on, there is no clear demarcation between insurance and savings and investment products. So perhaps looking at how much spending on insurance we do as a whole can shed some answers on this question.

How much should I be spending on insurance?

What type of insurance and how much of it do we need?

Let’s start off by establishing a baseline level of insurance which most people should think about getting, and see how that compares to their income. While the advice from financial advisors and insurance agents may differ, most of them are agreed that that the basic forms of insurance that someone managing their personal finances in Singapore should have are as follows:

Term Life insurance, for a sum assured of $500,000
Hospitalisation and Surgery insurance, like MediShield Life
Long Term Care insurance, like Careshield Life

In Singapore, MediShield Life and Careshield Life are mandatory, while Term Life insurance is easily obtainable from any commercial insurer. There are a gamut of other forms of insurance available, such as those for Personal Accident, Critical Illness, Medical Costs etc. but the three above can be considered the bedrock of a personal insurance plan.

So, how much does it cost to assemble such a basic personal insurance plan for someone aged between 30 to 40 (the typical age when we start thinking seriously about personal finance)? We have a few sources to refer to, such as:

Comparefirst.sg for term life insurance premiums
The Ministry of Health for premiums for MediShield Life and Careshield Life
Comparison tables issued by the Ministry of Health for Integrated Shield Plans

Between all these sources, we can glean the following results:

Insurance Type	Age	Annual Premium	Monthly Premium
Term Life / TPD	30	~$400	~$33.30
	40	~$700	~$58.30
MediShield Life	30	$390	$32.50
	40	$525	$43.75
Careshield Life	30	$214	$17.80
	40	$283	$23.60

Total Premiums	30	$1,004	$83.80
	40	$1,508	$125.66

Those who prefer being able to consult a medical specialist and stay at a better class of hospital wards can also opt to pay for an Integrated Shield Plan (ISP) instead of just paying for MediShield Life, which changes the total insurance premiums required as follows:

Insurance Type	Age	Annual Premium	Monthly Premium
Integrated Shield Plan	30	~$500	~$41.70
	40	~$750	~$43.75

Total Premiums	30	$1,114	$92.80
	40	$1,733	$144.40

Hence, for someone in their 30s or 40s, the basic personal insurance they need to have will cost them between $83.80 to $144.40 a month. Which in turn works out to something between 3.5% to 6.0% of a monthly income of $2,400 (including CPF), and less if they earn more.

How much do we typically spend on insurance in practice?

So based on publicly available data on insurance premiums, we should be spending about 3.5% to 6.0% of our income on insurance to ensure we are covered for most of life’s risks. Clearly, luxuries like having an Integrated Shield Plan (ISP) can be deferred for when we earn more, so there doesn’t seem to be much, if any, reason to spend more that 3.5% of our monthly income on insurance premiums.

But how much do we really spend on insurance in real life? To answer this question, we can take a look at the Household Expenditure Survey, which is run every 5 years. The latest data are for the years 2017/18, and before that, 2012/13. Insurance spending in these reports only covers insurance products with no savings element, i.e. endowment policies and whole life policies are excluded. Here’s what the spending data look like:

% of household spending	2012/13 Survey	2017/18 Survey
Insurance	5.45%	4.76%
– of which Health Insurance	2.80%	2.99%

Source: SingStats

A couple of things stand out from the Household Expenditure Survey figures:

The level of actual spending on insurance appears higher than what we estimated using data on insurance premiums earlier. However, this spending shown is as a percentage of total household expenditure, which should be lower than household income. So the earlier estimates of 3.5% to 6.0% still appear fairly accurate.
Health Insurance spending seem to be higher in real life than when we base it on premiums today. (Remember that there was no Careshield Life back in those surveys). And this suggests that the spending on Private Ward Integrated Shield Plans and Riders is higher than expected, and this could be at the expense of Term Life insurance coverage. Another reason is the inclusion of people aged 50 and above, for whom MediShield Life premiums can rise very sharply.

Therefore, when we look at household expenditures on insurance (pure protection), we find that it has been around 5% of total household expenditure. And so it is in line with our earlier estimates of 3.5% to 6.0% of income. In short,

Spending not more than 5% of our income on insurance premiums is a reasonable objective for personal financial management

What else are we paying insurance premiums for?

Insurance in Singapore, and Life Insurance in particular (covering life and health insurance) is pretty profitable. Is that possible if we are spending 5% or less of our incomes on insurance premiums? And, in fact, paying quite a lot of those premiums to the CPF Board? Or are there other premiums we are paying apart from the basic insurance we need?

One way to answer this question is to look at how much in premiums the insurers in Singapore earn, as a percentage of Gross Domestic Product (GDP) or National Income. A reliable source of this data comes from a publication from Swiss Re, where on Table IX within, they show the insurance penetration as a percentage of GDP by country:

Country	Total Premiums	Life Business	Non-Life Business
Singapore	7.82%	6.22%	1.60%
Hong Kong	18.16%	16.81%	1.35%
Taiwan	20.88%	17.48%	3.40%
Japan	8.86%	6.72%	1.60%
Australia	5.58%	2.13%	3.46%
United Kingdom	10.61%	8.32%	2.29%
France	8.89%	5.75%	3.14%
Germany	6.03%	2.41%	3.62%
United States	7.14%	2.88%	4.26%

Source: Swiss Re

There are quite a few things to unpack in this table, but here are some main ones:

The amount of total insurance premiums earned in Singapore looks comparable to other advanced countries. However, this is because the non-life business in Singapore is relatively small.
When we compare life insurance premiums, it is higher than a number of other countries, especially those which have state pensions. (Note that since 2016, the UK has shifted a significant portion of the pensions to private workplace schemes). Since Singapore does not have a state pension, and CPF contributions to CPF LIFE are not included here, we are paying quite a bit more than expected for life insurance.
This is especially so since life insurance premiums tend to be paid by individuals, out of wage income. As the wage share of National Income in Singapore is only 40%, compared to close to 60% for other advanced countries, it appears that we are paying some 15% of our income in life insurance premiums. And almost none of that goes towards pension or annuity products, unlike other countries.
Taiwan and Hong Kong appear anomalous as well, in terms of the amount that is paid as life insurance premiums. However, this is because investors in these countries tend to use endowment products as alternatives for bank deposits, in order to earn higher interest. Hence, the amount spent on life insurance premiums is overstated massively.

Hence, what we can conclude is that the majority of the insurance premiums paid in Singapore go towards whole life and annuity products. And these products should be assessed against other investment products, such as stocks and bonds and funds, instead of being part of the insurance budget, as the insurance coverage they provide is small relative to the cost.

Conclusions

How much should I be spending on insurance? This is a common question we face on our personal finance journey, and one which does not seem to have clear answers. Ask a Financial Advisor, or an Insurance Agent, and the answer is usually somewhere along the lines of 10% of your income. Look at the total amount of premiums paid in Singapore, and it appears to be closer to 15% of our income! So, how much should I be spending on insurance?

Here, we use two approaches to estimate this:

Firstly, by using published data on term life, hospitalisation and surgery, and long term care insurance premiums to estimate the costs of basic insurance coverage for everyone
Secondly, by looking at the household expenditures to estimate how much of it is spent on pure protection insurance premiums

Both these approaches show that spending not more than 5% of our income on insurance premiums is a reasonable target. But we usually spend more than that, especially on Whole Life insurance and Endowment products. However, in doing so, we need to be very clear that we should compare the spending on these products with other investment products, and not as insurance products. Because that is what they truly are.

You can read some of our other blogposts on insurance here: