At the time of this writing, I just came back from celebrating a relative’s son’s 1 year old birthday. It was a joyous occasion. The baby was distracted by the helium balloons oblivious that he was the reason for the celebration. It is all about him today and I rejoice with the first-time parents.
According to Singapore statistics, from year 2017 to 2021, on average, 38,000 to 39,000 first live babies are born. As expectant parents, what are the thoughts that go through their minds when they receive the news of a pending birth? What are the emotions newly-minted parents have when they hold the ‘flesh of their flesh and bone of their bones’ in the palms of their hands? It must be an unspeakable, overwhelming moment. A friend once commented that it is until he has his first child that he realised the meaning of sacrificial love.
It is instinctive for all responsible parents to want to give the best to their child.
Inevitably, risk management by way of mitigating risk using insurance will be one of the key considerations.
So how should one look at insurance for children? What are the types of insurance parents should consider? What is the amount of coverage needed? Is endowment a good savings tool for tertiary education funding? What about legacy planning?
Getting your child insured
The purpose of insurance is to insure. So, what are the risks a child may potentially be exposed to? What is the financial impact of leaving such risk exposed? Are there alternatives to mitigating the risk?
a) Inpatient medical expense indemnity
MediShield Life. All Singaporean and permanent residents, including the very old and those with pre-existing conditions are insured under MediShield Life. It is a basic health insurance plan administered by the Central Providend Fund (CPF) Board. It helps to defray large hospital bills and selected costly inpatient treatments like dialysis and chemotherapy for cancer. MediShield Life coverage starts when the birth of a child is registered. Its payouts are pegged at B2/C type wards in a public hospital with an annual limit of $150K per policy year. There is a cap to each benefit per the schedule table and the coverage does not include pre/post inpatient consultation/treatment. There is also no rider to minimise out of pocket expenses. The premium can be fully paid using the parents’ CPF Medisave or cash.
If you prefer a higher admission ward type, you will need to buy a private integrated shield plan to enhance the child’s MediShield Life coverage together with a comprehensive rider to cover the annual deductible and reduce the out of pocket expenses by capping the copayment component. The earliest to get your child insured is from Day-15 of birth or the discharged date from hospital, whichever is later. In advising my clients, I will let them know that if they have budget to buy only 1 insurance, inpatient indemnity insurance like the integrated shield plan would be the one.
If you have the budget, do opt for coverage suitable for admission in a private hospital or single bedder in a public hospital. The reason for the former is to get earlier access to treatment. For the latter, with a single bedder, it gives an option for the parents to stay with the child so as to give the parents the peace of mind and the rest that is so needed to take care of an ailing child.
b) Congenital abnormality
According to World Health Organisation, an estimated 6% of babies worldwide are born with a congenital anomaly. These conditions can be inherited or caused by environmental factors. Their impact on a child’s health and development is not always severe and sometimes can be quite mild. Some conditions could have developed prenatally and may be identified before, at birth or later in life.
With the exception of AIA HealthShield which offers “As charged” benefits from policy inception, other integrated shield plan providers apply a waiting period or lumpsum cap for congenital abnormality coverage. The waiting period for congenital abnormalities benefits to be payable varies from insurer to insurer. This ranges from12 months (Shield plan under Singlife with Aviva and AXA shield plan) to 24 months for the rest. Some insurers offer a lumpsum cap of $10K to $20K per year for congenital abnormalities benefits for the insured within 24 months of birth, provided that the policy is incepted before the congenital abnormalities are first diagnosed. Others offer a lifetime cap of $5K congenital abnormality benefit for each mother’s biological child up to 10 months of birth. With the comprehensiveness of such integrated shield plan, do you wonder if there is indeed a need for prenatal or maternity insurance aside from ensuring the child’s insurability upon diagnosis with congenital abnormality? You may want to read this article my colleague has written on maternity insurance.
The greatest concern parents have is always on the health of their child. If a child is diagnosed with a severe congenital abnormality at birth, treatment could be prolonged. MediShield Life can help to defray part of the inpatient expenses. Ongoing follow-ups, treatments, medicine have to be paid out of pocket. There is also the emotional and psychological aspect of taking care of the child’s total wellbeing. For some, stopping a treatment is unthinkable as there is uncertainty on whether there will be long-term consequences if the treatment is not followed through. I cannot stress enough the importance of insuring a child early when the child is born healthy.
c) Insurability if the child is diagnosed with a major illness or had a pre-existing condition
If the child is diagnosed with a major illness, there can be 2 financial implications. I.e.,
i. Provision for alternative medication or seeking second opinion.
ii. Potential loss of income if one of the parents has to leave his/her full-time employment to be the primary care giver.
As such, the amount of coverage required will be a lumpsum of $150K to $250K or up to 2 to 5 years of the parent’s income replacement.
The premium is usually affordable if one considers using plain vanilla term insurance. Of recent times, insurers offer multiple critical illness (CI) term plans which cover for early-stage CI as well as CI relapsed. Term of coverage can be till age 65 or child age 99. While we normally advocate term insurance, the premium for a whole life coverage with critical illness riders for a child is just as competitive.
Another thing to take note is, to avoid moral hazard, the insurer will not offer coverage for the child more than the parent. The cap is $2M subject to conditions, one of which is financial assessment.
If a child has a pre-existing condition, the insurer would:
i. Exclude the coverage.
ii. Decline or postpone the case. In the event a case is declined, it has to be declared in future health declaration as well.
iii. Postpone the application.
Do work with an independent wealth adviser to determine how best to get the coverage as some insurers may be less stringent than other. If in doubt, it is advisable to apply for concurrent applications with at least 2 insurers.
For newborn babies, the minimum age is 30 days for life insurance.
d) Death or permanent disability
As there is no income replacement need on the unfortunate demise of a child till their working years, coverage for death may not be a risk to protect against. The risk, however, is when a child suffers from a total and permanent disability (TPD). TPD is defined as a state of permanent incapacity in which the life assured is confined to a home, hospital or institution, requiring constant care and medical condition for at least 6 consecutive months.
As TPD coverage cannot be bought as a standalone, a term or whole life plan is typically bought with TPD bundled. The amount of coverage to apply for depends on the parents’ budget subject to the insurer’s cap of $2M. The maximum life cover per child is up to the parents’ cover, or lower.
e) Accumulating via endowments / education saving polices or investments
The cost of tertiary education depends on the course of study and the region, whether it is local or overseas. If it is overseas tertiary education, the amount required for a non-medicine course in USA is 30% higher than the amount for Australia. This is inclusive of tuition fee and living expenses.
As the options are aplenty, I will lean more towards accumulation via investments for the following reasons:
i. The return from endowments or savings plans using insurance barely exceeds inflation rate. This is grossly inadequate as the inflation rate for tuition ranges from 4 to 6% p.a.
ii. Inflexibility. The premium to be committed is dependent on the coverage at policy inception. This largely depends on:
• The amount you are accumulating towards.
• The tenure of the policy.
• The return of the policy.
Should you want to increase the savings rate, you will have to buy a brand-new policy. For various reasons, should your cashflow be tight, missing out any premium payment may potentially result in policy lapsing or loan taken against the policy cash value at an interest rate of 6% to 7%.
iii. Aside from the above 2 disadvantages, one can add a rider to the endowment plan to waive future premium till the policy maturity should the payer be diagnosed with permanent disability, major illness or demise. This gives the payer the assurance of the savings plan. However, this risk can also be mitigated using term insurance on the life of the parents during the accumulating years should you already have an accumulation plan using investment instruments.
In working through the insurance program for the child, do give some thought regarding the affordability for the child to take over the plan when he/she starts working, would the premium expense take out too large an amount out of the young graduate’s salary?
At Providend, when we help our clients with their wealth planning, provision for children’s tertiary education is done as part of a holistic planning including other life and financial goals that the parents are working towards. This gives our clients a higher certainty of success to provide for the people they care about.
As I glance through the photographs taken with my phone camera, my heart is full. This young couple has provided a safe and loving environment to optimise their child’s thriving abilities. Efforts are applauded over cleverness. There is constant affirmation to develop child’s confidence. The baby was taught sign language to encourage self-expression. He was introduced to books early. He enjoys the touch and feels books as his senses are engaged. Before he turns one, he was able to put a loop over the pole of a hoop toy. This comes about through persistent effort over many days. When he eventually got it, the smile that stretched over his toothless grin was priceless.
This is an original article written by Eleanor Ng, Associate Director of Advisory Team at Providend, Singapore’s First Fee-Only Wealth Advisory Firm.
For more related resources, check out:
1. Insurance for Newborns
2. My Realisations of What Wealth Planning Is Really About
3. Are You Getting the Best Value from Your Wealth Adviser?
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