Should I Care about Careshield Life? Is it a rip-off?
It is a month since the introduction of Careshield Life to the public with hardly any data or information to make sense of the premiums vis-a-vis the payouts. By now, everyone must be wary of the Eldershield experience, where only 3% of the premiums collected have been paid out. This of course leads to the suspicion that it is a scheme to profit at the expense of the insured. Is this the case for Careshield Life as well? In short, should I care about Careshield Life, or is Careshield Life just a rip-off?
Now, from our previous dissection of CPF Life, we know that it is unlikely that Careshield Life is a rip-off. After all, if the CPF administers it and we pay the premiums through Medisave, there are no profits for shareholders, salaries for the staff, or operational costs to cover for the Careshield Life. However, to figure out what Careshield Life is worth to us, and what the private Careshield Life Supplements on offer are worth to us, we need to do a little digging and modelling.
Or, we could go about making our insurance decisions like this guy below. Your choice.
One way to make your insurance decisions
What is the chance of being disabled?
For a start, let’s try to figure out what are the odds of being disabled. There are not a lot of statistics on this, but from the Eldershield experience between 2002 and 2018, we know that the chance of disability over our lifetimes is about 50%. More specifically, this is around 40% for the men, and 60% for the women (owing to their longer lifespans). While this may seem high, remember that there is something else which we face a 100% chance of over our lifetimes. Yes, we are 100% likely to die in our lifetime! So, the chance of being disabled is significantly less than the chance of death, and we can proxy the chance of disability from year to year as being 40% of the chance of death for men, and 60% for women.
Note that this 40%/60% chance refers to disability defined as needing assistance for 3 out of the 6 Activities of Daily Living (ADLs):
Activities of Daily Living (ADLs)
There is also evidence that if we define disability as needing assistance for 2 out of 6 ADLs, the chance of disability is a third higher. That is, 52% for the men, and 80% for women.
How long will we live for after being disabled?
This topic has even fewer statistics for Singapore than the chance of disability. Keeler et al (2010) indicate that a disabled person has the life expectancy of someone at least 10 years older. For example, a disabled man aged 70 is likely to survive for 6.5 more years, while a disabled woman can survive for another 11.5 years.
Does the life expectancy of the disabled person differ if disability was defined as needing assistance for 2 out of 6 ADLs instead of the usual 3? Lynch et al (2003) find that there is less than a year’s difference in life expectancy across these definitions. Hence, we can assume that they are the same.
We probably need to tweak these figures for Singapore, as we have the world’s longest life expectancy. If we assume the life expectancy of someone who is disabled is that of someone between 12 to 16 years older (depending on the age when the person becomes disabled), we get some reasonable estimates.
For example, someone who is disabled at the age of 30 can expect to live until 66 years of age for a man, or 70 years of age for a woman. Someone who is disabled at the age of 65 can be expected to live until 75 years of age for a man, or 77 years of age for a woman. And someone who is disabled at the age of 75 can survive for 5.5 years for a man, and 7 years for a woman. We show some of these assumptions below:
Assumptions of chance of disability and life expectancy for men in Singapore
|Age||Chance of Death||Chance of Disability||Life Expectancy (Normal)||Life Expectancy (Disabled)|
|30||0.04%||0.02%||51 years||36 years|
|40||0.09%||0.04%||42 years||28 years|
|50||0.25%||0.10%||32 years||20 years|
|60||0.69%||0.27%||23 years||13 years|
|70||1.86%||0.74%||15 years||8 years|
|80||5.31%||2.12%||9 years||4 years|
Assumptions of chance of disability and life expectancy for women in Singapore
|Age||Chance of Death||Chance of Disability||Life Expectancy (Normal)||Life Expectancy (Disabled)|
|30||0.02%||0.01%||56 years||40 years|
|40||0.05%||0.03%||46 years||32 years|
|50||0.16%||0.09%||36 years||23 years|
|60||0.38%||0.23%||27 years||16 years|
|70||0.96%||0.57%||18 years||10 years|
|80||3.51%||2.10%||11 years||5 years|
Now, let us look at the Careshield Life and Supplement Plans.
How does Careshield Life work?
In a nutshell, “CareShield Life is a long-term care insurance scheme that provides basic financial support should Singaporeans become severely disabled, especially during old age, and need personal and medical care for a prolonged duration (i.e. long-term care)”. Taking the perspective of a 30-year old, you pay a premium of $206 per year for a man, or $253 a year for a woman. These premiums rise by 2% a year for the next 37 years, until you reach the age of 67, after which you do not need to pay the premium anymore. At the age of 67, the yearly premiums will likely amount to $429 a year for a man, and $526 for a woman.
In return for the premiums paid, if you are disabled (i.e. need assistance for 3 out of the 6 ADLs), you will receive a monthly payout, which starts at $600 if you are disabled this year, and rises by 2% per year until a claim is made. Once a claim is successful, you will receive the fixed monthly payout for life, and pay no further premiums.
So, as an illustration, a man who pays the $206 premium now, and is immediately disabled, will receive $600 a month for the rest of his life, which is estimated to for another 36 years, or $259,2000 in total! A woman who pays the premiums starting at $253 a year for 20 years before her disability will thereafter receive $892 a month for the rest of her life, say, for another 23 years. So for her, she pays total premiums of $6,523, and receives the payouts of $246,192 in total. You can work out the other cases!
Let’s put together this information on the Careshield Life premiums and payouts, along with the assumptions we make on the chance of disability and the years of life after that. We can now work out the value of the payouts, premiums, and the net value (i.e. value of payouts less premiums) of Careshield Life below:
The Value of Careshield Life by Age of Disability Claim
Note that this chart of the value of Careshield Life is from the perspective of the claimant. If you suffer disability at the age of 50, say, the value is the highest because the present value of the premiums you pay to date is the least relative to the present value of the payouts you will receive. What we can see is that thereafter, the value of Careshield Life will fall, as we pay more premiums, but get fewer payouts, as the life expectancy after disability gets shorter and shorter with age. In fact, the value of Careshield Life is negative after the age of 85, but it does not matter to you anymore, since your premium payments will end at age 67 anyway.
If we further weight the net value of Careshield Life at each age according to the chance of making a claim, using a discount rate of 4% (the interest rate on the CPF Medisave Account), we get a value of around $3,000. This feels about right, since we expect the fair value of this insurance to be zero. What this also means is that Careshield Life is a good, value-for-money insurance plan, since we expect get back exactly what we put into the plan, with nothing going to profits or operational overheads at all.
Incidentally, the chart of the value of Careshield Life for women look exactly the same as it does for men, despite the longer lifespans, and the higher chance of disability, so we can conclude that it is a good, value-for-money insurance plan for them as well. Careshield Life is not a rip-off! And the truth is that, just like CPF Life, it is what we expect from the CPF Board.
Careshield Life, just like CPF Life, is a good, value-for-money insurance plan. Let’s not have any baseless allegations of how it will make profits at the expense of CPF members!
What about the Careshield Life Supplements?
Careshield Life Supplements are not like vitamin and mineral tablets to prevent disability, but are long term care plans from by private insurers on top of Careshield Life. At the moment, there are three providers. Since we are not in the business of endorsing private companies, we shall just label them A, B and C. In reality, the plans are all pretty similar, offering a a flat monthly payout in even of disability (defined as needing assistance for 2 out of 6 ADLs), for a flat annual premium which is payable up to the age of 80, 84 or 99. Other variations on offer for these plans are premium waivers for partial disability, and extra payments in the event of a claim (up to 6 months extra) and also payments conditional on whether you have dependents living with you.
What’s the value of these long term care plans from A, B and C? Suppose we take up a plan for a monthly payout of $2,000 upon 2 out of 6 ADL disability. We will pay premiums of between $614 to 814 a year for men, and between $860 and $1,120 for women. The chart of the value of a Careshield Supplement Plan looks like this:
The Value of a Careshield Supplement by Age of Disability Claim
The first thing we notice is how the value of the payouts and net value go down continuously from the age of 30. This is unlike what we see for Careshield Life. And regardless of whether the plan is from A, B or C, the net value of the plan goes below zero by the age of 78 to 80. This is even while premiums are still payable. Finally, compared to an expected value of $3,000 for Careshield Life, these plans have a value of between $1,300 to $2,000 for the men, and between $160 and $1,300 for the women, even though the monthly payouts are far higher at $2,000 for these plans.
What accounts for the difference between these Careshield Supplements and Careshield Life? Apart from the need to earn profits and cover distribution and operational costs, the main shortcoming is that these plans pay a flat monthly payout. $2,000 a month may seem a lot compared to the miserly $600 from Careshield Life now, but you aren’t likely to be making a claim today. When you are likely to make a claim, say at the age of 75, Careshield Life will have a monthly payout of $1,463, which is comparable to the $2,000 of the Careshield Supplements, despite you having made far less premium payments to Careshield Life.
If we assign a score of 100 to Careshield Life for being the best value-for-money, and 0 to the Careshield Supplement plan with the lowest value, we find the scores to be as follows:
|Long Term Care Plan||Score|
|Careshield Life (CPF)||100|
So the biggest problem with the Careshield Supplements from the insurance companies is that the premiums and payouts just do not match how we are likely to make claims for disability. Careshield Life works well because we have a low risk of disability when young, and a higher risk after the age of 65. The payouts adjust for this. Low initially, then rising by 2% every year, so that they will be higher later when we need them. Similarly, the premiums are lower now when payouts are lower, and rise by 2% to match the higher payouts over time, and best of all, stop at the age of 67.
In contrast, the private Careshield Supplements work the other way around. High premiums now, and for longer, and lower inflation- adjusted payouts in the future when we need them most. No wonder they are such poor value. But what is a poor deal for the insured, is likely a good deal for the insurer. Insurance is largely a zero-sum game. Having said this, note that like Careshield Life, these Supplements are not really rip-offs either. They just offer poorer value.
Now, one of the Careshield Supplements on offer now has an increasing payout option with comes with increasing premiums as well. If we assume that both premiums and payouts rise by 2% a year, on the scoring scale above, it scores the same 100 points as Careshield Life in terms of value-for-money.
The private Careshield Supplement Plans with level premiums & payouts offer less value-for-money as Careshield Life itself, since the amounts claimable do not match with the actual pattern of claims in our lives
So, is Careshield Life a rip-off which will charge us more in premiums than it pays out upon disability? Hardly. Like CPF Life, it is structured on clear actuarial principles, without overhead costs and a profit motive. As a result, it represents the best value-for-money long term care insurance you can get. Careshield Life is definitely not a rip-off!
On the other hand, the private Careshield Supplements offered, especially the ones with level premiums and payouts, represent quite poor value-for-money compared with Careshield Life, even if they pay out earlier (upon needing assistance for 2 out of 6 ADLs). This is because the level premiums and payouts mean that a larger amount of the premiums and payouts we pay or receive are in the younger years, when the chance of disability is very, very small. And when the risk of disability rises post age 65, the real value of the payouts gets smaller over time. Also, the premiums payable stretch beyond age 65, and this will drain your Medisave even faster.
Finally, even though we know Careshield Life is not a rip-off, there is also the question of whether we need long term care of disability insurance in the first place. This may sound like a controversial position to take, but remember:
- The risk of disability is really quite low, if we compare it to the risk of death. So, it is far more urgent to get insurance for death than for disability
- The mandatory Total and Permanent Disability (TPD) riders on any term or whole life insurance also cover disability as well. Do check your insurance policies! So if you have insurance cover for death, you have insurance for disability as well, at least until the age of 70. And these riders are pretty cheap too.
- And if you have done your retirement planning well, after the age of 70, your long term care needs can come from your retirement funds, since you have far fewer years to draw then down than planned for.
Emmett Keeler, Jack M. Guralnik, Haijun Tian, Robert B. Wallace, and David B. Reuben (2010). The Impact of Functional Status on Life Expectancy in Older Persons, Journal of Gerontology: Medical Sciences