Medical need is your top priority in insurance
We do not know when accident will happen but it is happening every day. If health and safety are your top concerns, medical care should be your top priority in insurance. The reason is simple: you may not wish to knock someone but you cannot stop someone from bumping into you. Singapore government realized the needs for medical insurance for all Singaporeans and therefore MediShield is born. In 2009, CPF revamped MediShield to increase premium for better coverage. The revised Medishield aims to take care of as much as 80 percent of the big bills. Yet, 100,000 women are uninsured because they are housewives with no MediSave. So, is MediShield an effective medical care insurance for us?Weaknesses of MediShield
From Dr Money website, we realized that Medishield is working harder as it is paying 53% of the premium collected while private insurance companies are paying only 22% of the premium collected. However, it is not an all-rounder. Below are some of its limitations:- Age insured is capped at 85. If you live beyond 85, you lose your "Shield";
- MediShield only covers hospitalization/surgical/day surgery and approved outpatient treatments sought in MOH-accredited medical institutions in Singapore. Expenses incurred at overseas cannot be claimed;
- MediShield pays PART OF THE BILLS at Class B2/C wards in restructured hospitals. If you choose to stay in Class A/B1 wards or private hospitals, you will rather die when you receive the bills. A shiny example is spelt out in MOH website whereby Medishield pays only S$1438 out of S$50,000; and
- MediShield does not pay your deductible and co-insurance payments. The complex calculation of deductible and co-insurance draws more money from MediSave and less money is available for MediShield deduction. For long-term patients, they experienced rapid vaporization of their CPF MediSave account and when it is dry, there is no more payment available for future basic MediShield premiums.
Sourcing for alternatives from private insurance companies
In view of these issues, private insurance companies fill in the vacuum of providing the needful. They provide extensive coverage, overseas coverage, guaranteed lifetime policy renewal and even final expenses (how nice they put it for coffin money!). They offer riders for sophisticated customers who demanded ZERO-dollar upfront. However, the deductible and co-insurance are higher than MediShield which makes the MediSave pool dry up even faster in certain circumstances. The complexity of different plans further confuses the consumers as they cannot compare the plan effectively. Every financial agent is biased and only introduces plans whereby he/she maximize the commissions to reward the promotion effort. The consumers are suffering from this system as they may buy a plan which they cannot afford in the future. However, you can stay in Class B1/A wards or private hospital if you choose the right policy (So it is encouraging to die faster in a private hospital than to suffer MediSave deficit with a long-term illness!)The need for a comparison table
A comparison table is needed to compare the plans available in the market and there must be indicators to see which plan is comparatively better. I limit the comparison to the next tier of upgrade to MediShield when full coverage (full payment of deductible and co-insurance) is not covered. More restrictions are set to simply the table as depicted below:- Limit for policy year and lifetime are adequately covered. According to the blog of Mr Tan Kin Lian (ex-CEO of NTUC Income): "Out of 2 million people who are insured for the past 10 years, nobody has ever accumulated a lifetime bill of more than $300,000. Most of the large bills are probably less than $100,000." Unlimited or half a million lifetime limit are just marketing gimmick to sign you up for the plan;
- Out-patient medical bills are not included to simplify the table;
- Riders are not included (except for NTUC PLUS/ASSIST for simple comparison); and
- Specific benefits (eg. Free child coverage), relating to various private companies, are also excluded.
Benchmarks
To compare policies, benchmarks are introduced. Below are the descriptions:- Percentage of bill paid by insurance measures the amount of medical bill paid by the insurance company over the total medical bills. (Higher is better)
- Claims/Premium paid measures the insurance payout over the premium you paid over the years. (Higher is better)
- Future Premiums (to be paid till your death) considers your ability to service your premium till you die. (Lower is better)
These factors are given a certain weight to produce the ranking for your consideration.The file (version 1) can be downloaded HERE (outdated).Update: Version 11 is available HERE. See some illustrations HERE.Feel free to explore the possibilities and email me of any issues. The file will be constantly updated and I will provide some comparisons in the coming weeks when I am free. If you wish to inject constructive ideas, feel free to email me at sglongfeng@gmail.com. I hope it will assist in choosing the best plan for you.
WHAT IS CPF LIFE?
Singapore is not a welfare state and the government has no obligation to take care of your retirement and golden years after your retirement. The abolishment of the pension scheme (inherited from the British Colonial days) and the introduction of the CPF scheme simply tell Singaporeans that they must not depend on government's mercy if you are old and poor. Around 15 years ago, a few insurance companies introduce annuities policies for the retirees and many benefitted from the scheme with monthly payout of a small amount of money till they die. Due to the lack of financial acumen, those who did not take up this offer suffered now as they see their savings dry up after 20 years in CPF retirement or fixed savings accounts. The recent years of low interest rate on fixed deposits at 1% due to the turmoil worsens their woes. Inflation of prices on daily necessities shrinks their pool of retirement funds.CPF LIFE aims to bridge the gap and offers this retirement vehicle in view of the increasing pool of retirees plunging into financial difficulties. CPF LIFE is definitely better than the Minimum Sum Scheme (MSS) which only last 20 years. In fact, it is replacing MMS and applies to those who are born after 1957 and have at least S$40k in the retirement account (RA). However, it arrives 15 years (compared to the private sector) too late and those who are already in trouble will not enjoy as much as their money has depleted over the years in fixed deposits. Those who are below 55 years will definitely benefit from this scheme. 30,000 residents (reported by TODAY) flooded to CPF and rushed to place over S$1.26 billion to buy CPF LIFE. But is this a good scheme? Is it suitable for you? Why 670,000 Singaporeans/PRs are not responding to this 2-month old call?POSSIBLE REASONS FOR DELAY
Since 15 years ago, private firms are soliciting annuities policies and 71,000 are in force as of 2Q 2009. This tells us only 90% of residents are not aware about these policies, fail to see any advantages offered by these policies or cannot afford them. Indeed, there are 2 barriers of entry for these policies - a minimum sum (tens of thousands) is required and there is a waiting time (5 years) to collect the first payout. After working for many years and retire at 55, they can finally touch and feel their retirement money in the CPF. It is unbearable to part their hard earned money and tell them to wait 5 more years. Many choose to spend on their children or go for tours to see the world.CPF LIFE eliminates at least 1 barrier for many concerned. You can buy any amount of annuities and those who are born before 1947 can get the first payout in less than 5 years. So we see a reshuffle of cards in the field of annuities and I hope private sectors will introduce better schemes soon. More offers and products in markets are always good for consumers. The promotion of such policies also benefits all residents with CPF Board pumping in more money to introduce what is the concept of "annuity" to many residents.However, some just cannot afford to buy these policies as they are the sole income earner in the family. Sadly, many can afford but are not financial savvy to buy them. After all, to these folks, money is a sensitive topic and this quiet generation believes in keeping their money in trustworthy banks as fixed deposits over unit trusts, shares or other investment instruments. They fail to realize that their money suffer from inflation and depreciation over time. Let me tell you why.CONCEPT OF PERPETUITY
Perpetuity (aka perpetual annuity or infinite annuity) refers to annuity that pays forever. "Forever" is a strong concept because it implies no time limit. As long as you are alive, you will receive monthly income from CPF LIFE based on a one-time fixed amount you buy previously. The only challenge for you is to stay alive and outlive others. This promises continuous income over fixed deposits concept. An example will better illustrate the concept of perpetuity.Upon retirement, you wish to place S$10k in a bank which promises 2.5% yearly fixed deposit interests (current fixed deposit interests is 0.9% for S$30k). You wish to withdraw S$1k (at the beginning of every year) from the fund as yearly expenses. Using simple financial formula, you will exhaust S$10k in 11.32 years. For perpetuity, the present value (PV) for S$1k yearly withdrawal at 2.5% interests is S$40k. This is 4 times more the amount in an ideal condition. This simply implies that if you put S$40k in a bank which promises yearly 2.5% interests, you can collect S$1k forever or until you die, whichever is shorter. So you must live longer than 11.32 years to benefit from the perpetuity scheme. Eventually, the question to ask is not which scheme benefits you more how to live healthier and longer.THE CPF LIFE'S OFFER
In the offer, there are 4 plans to choose from. The majority chose to buy the LIFE PLUS PLAN while one-third signed up for the LIFE BALANCED PLAN. The differences lie in the payouts to beneficiaries and a compromise between waiting time and premiums. Each has its own merits. The other 2 extreme plans are the LIFE BASIC PLAN and LIFE INCOME PLAN which promises the lowest and highest monthly payout respectively. The former is unattractive to many while the latter targets unmarried individuals with no friends, siblings and children. Interestingly, the difference in amount between the payout is insignificant for small amount (<S$67k) and we are talking about differences of maximum S$60/month for a maximum payout of S$440.LIFE-BONUS (aka L-Bonus) is thrown in to encourage those born before 1963 to take the plunge. Those qualified will enjoy up to S$4k in bonus payouts if they join before a specific date.AN ILLUSTRATION
Nothing beats an illustration. For the benefit of those above 62 years old and still hesitating about buying CPF LIFE, I shall offer you alternatives in choosing whether you should buy CPF LIFE.You are a Singaporean male born in 1 Jun 1947. You have missed your chance to buy the annuity policy when you are 55 years old when you withdrew your CPF account 7 years ago. You do not qualify for L-Bonus as your Annual Value of Property (AV) is more than S$11k. You are interested in the LIFE PLUS PLAN and you found out that your monthly payout after you join LIFE is between S$56 to S$60. So is this plan better than depositing S$10k in the bank which promises 2.5% yearly interests without fail?SCENARIO 1: FIXED DEPOSITUsing financial formula to calculate N (periods), we derive that it takes 18.5802 years to exhaust your full savings. This means you will be broke in Jul 2027 if you withdraw S$56 monthly from the bank.SCENARIO 2: CPF LIFE PLUS PLANIf you choose LIFE PLUS, you will collect S$56 monthly till you die. To win over scenario 1, you need to stay alive after Jul 2007 which is very possible given that you are forecast to live till 2039 according to the statistic provided by the World Bank for Singaporeans. If things go according to plan, you will enjoy 12 more years of annuity over scenario 1. Therefore, it is not too late to jump into it now.SCENARIO 3: OTHER INVESTMENT?So what is the interest rate which can beat Scenario 2? Using financial analysis on perpetuity, if the investment vehicle can offer more than 7.2% of annual interests, it is a better choice over LIFE PLUS PLAN. In addition, this investment must continue to produce > 7.2% of annual dividends without fail forever.CONCLUSIONS
It is encouraging to see that the government is stepping in to assist Singaporeans in their retirement planning. However, the financial burden of meeting the annuity payouts will lie in the continuing efforts of making money from the sum collected from the retirees. In view of the ever changing landscape of the financial worlds, it will be a challenge to meet up with the promises if global recession or hyper inflation hits Singapore. Having said that, I welcome any request to do the above 3 scenarios for you if you can provide the following details:- Date of Birth;
- Desired amount to invest in CPF PLAN; and
- The expected monthly annuity.
The above are simple financial analysis for your consideration only. We hold no responsibility if the data we provide are erred or misinterpreted.
