SINGAPORE – The Monetary Authority of Singapore (MAS) wants to make it easier for consumers to buy simple and cost-effective insurance policies that meet their needs, thus narrowing protection gaps here.

To achieve this, MAS is proposing cutting down on the amount of information consumers have to give to financial institutions selling these policies.

The proposals apply to term life insurance policies, standard critical illness riders sold with term life insurance, and standard standalone critical illness policies. 

Representatives from financial institutions will be allowed to collect less information from clients when they make recommendations on these policies that are based on the Basic Financial Planning Guide.

The guide outlines a few rules of thumb for individuals to address their savings, insurance and investment needs. For example, consumers are advised to spend at most 15 per cent of their take-home pay on insurance protection.

They are also encouraged to obtain insurance coverage of nine times their annual income for death and total permanent disability (TPD), and four times their annual income for critical illness.

The guide was launched in October 2023 by MAS and national financial education programme MoneySense – in collaboration with the Central Provident Fund Board and finance industry associations – and updated on Jan 31 with six variations for individuals at various life stages.

MAS said the proposals to collect a reduced set of client information also aim to promote the guide’s adoption by the financial advisory industry.

A Life Insurance Association Singapore (LIA) study released in September 2023 showed a 21 per cent mortality protection gap and 74 per cent critical illness protection gap in 2022.

Term insurance policies are generally more cost-effective for obtaining protection compared with bundled insurance products such as whole life insurance policies and investment-linked policies, noted MAS.

“For the same coverage, term insurance policies are generally cheaper as they focus only on providing insurance protection and do not have any investment element. In addition, as term insurance policies are renewable annually, consumers can review their insurance coverage vis-a-vis their financial situations every year,” said MAS.

Meanwhile, a standard critical illness policy provides coverage against LIA’s list of 37 medical conditions.

Non-standard critical illness policies are excluded from the exemption to collect reduced information as they may have additional and bespoke coverage features, and may cost more, said MAS.

If the proposals are adopted, financial institutions will need to ask clients only for their financial objectives; their current insurance policies that provide coverage for death and TPD, critical illness, or both; and their annual income.

For standalone critical illness policies and critical illness riders, clients must also disclose any medical conditions they may have.

Clients currently need to disclose other information such as their financial situation – including assets, liabilities, cash flow and income – their financial commitments, and information about their dependants where applicable.

When relying on the exemption to collect reduced information, financial institutions will be required as a safeguard to explain all the rules of thumb in the Basic Financial Planning Guide to the client, said MAS.

They must also guide the client in budget allocation to meet key financial needs, such as setting aside sufficient emergency savings, and confine their recommendations to the applicable policies.

Financial institutions also need to verify that the client’s total death and TPD coverage does not exceed nine times his annual income, after taking into consideration existing insurance policies and the recommended policy.

The client’s critical illness coverage must not exceed four times his annual income after factoring in these policies, said MAS.

As another safeguard, financial institutions must also verify that the client’s total annual outlay on insurance policies that provide death, TPD and critical illness coverage does not exceed 15 per cent of take-home pay.

The regulator added that clients may have existing policies that provide coverage for death, TPD or critical illness which include bundled insurance or non-standard critical illness policies.

“In such a situation, clients may not be able to achieve insurance protection based on the rules of thumb in the guide. The recommendation of a policy... by the FA (financial adviser) representative may cause the client to exceed 15 per cent of their take-home pay, or place the client in a position where the gap on death or TPD coverage is addressed but not the gap on critical illness coverage, or vice versa,” said MAS.

“In such a situation, more care should be accorded by FAs and their representatives, when advising clients on ways to address the insurance protection gap, such as allocation of budget across the different financial needs, options available and risks of switching products,” said MAS, adding that there might be less merit to reduce the information collected from clients in such circumstances.

Once the proposals take effect, it will be an offence under MAS’ regulations if financial institutions do not comply with the new rules and safeguards, said an MAS spokesperson in response to queries from The Straits Times.

Non-compliance could attract regulatory actions, including a penalty of up to $100,000.

Where there is misconduct by financial institutions or their representatives, MAS will investigate and take firm enforcement actions against errant financial institutions and representatives.

For representatives, this could include prohibition orders to bar those who have committed serious offences from performing regulated activities in the financial industry for a specified period, said the spokesperson.

MAS launched a consultation paper on Feb 2 to seek feedback on its proposals.

Observers told ST that the proposed changes are a step towards broader financial inclusion, but FAs will need to continue making sure that they understand clients’ needs well.

Etiqa Insurance Singapore chief executive Raymond Ong said that a more streamlined information collection process will enhance the customer experience, and allow FAs to focus on providing quality advice and building client relationships.

“Consumers could provide additional details on a voluntary basis, such as their financial commitments, risk tolerance and investment portfolio, enabling FAs to offer more personalised advice to consumers… In addition, enhancing financial literacy among clients can empower them to make better informed decisions,” he added.

Mr Colin Chan, Great Eastern’s managing director for group marketing, said the measures significantly reduce the amount of personal information that financial representatives will need to collect from their clients, under specific circumstances.

“Some customers may be looking for a broader menu of insurance options when it comes to closing their protection gap. On behalf of these clients, insurers have to work with MAS during the consultation process to deliberate on how they can facilitate these purchases while being compliant to the new proposed rules,” he said.

Mr Winston Lim, UOB’s head of deposits and wealth management, said the consultation paper’s general direction aligns with the bank’s risk-first approach to wealth management, which prioritises adequate insurance coverage and protection before building and enhancing assets.

He also urged customers to refer to the six examples listed in the Basic Financial Planning Guide which show that saving, investing and insurance protection is possible at every life stage and income strata for working adults and retirees.

MAS asked financial institutions, consumers and other interested parties to submit their comments on the proposals by March 15. They can view the consultation paper here.