Integrated Shield Plan (IP) Premiums: How Can We Start Inflation-Proofing The Premiums Now?
A discussion I have with a friend:
Mr Friend: Hi Bro, you know I contracted Covid last month?
Me: I didn’t know. How did you go?
Mr Friend: It was Omicron so the symptoms were mild. I did not have to seek treatment in a hospital.
Me: That’s good.
Mr Friend: Talking about hospital treatment, I have noticed that my integrated shield plan premiums have increased a fair bit over the years.
Me: Great observation!
Mr Friend: But if they keep going up, how are people going to afford especially in their retirement years, when they are not getting an income?
Me: Can. We can start laying the groundwork to mitigate such increases, now.
In 2014, government data shows that there were 3.656 million people who were covered by Medishield Life, of which 2.485 million also had a private medical policy which we know as Integrated Shield Plan (IP). So, Singaporeans clearly know the importance of adequate medical coverage as more than two-thirds of people have gone beyond universal Medishield Life coverage to take up an IP.
It’s a common concern among the clients I work with, that the premiums for their IP have been increasing over the years. There are three main factors for increases in premiums:
- General medical inflation
- Advancement in medical technology (itself a great thing) which enhances efficacy, but which also results in more expensive treatment
- Claims experience
The Cost and Rising Costs of Affording IP
In addition to the increases due to the factors above, IP policyholders also need to fork out higher premiums with age, as IP premiums rise to account for the higher probability of claims. The undeniable fact is that we will all grow older, and that puts upward pressure on IP premiums. Let us take a look at the premiums of a popular IP*, in Table 1:
Table 1: Premium Table of A Sample IP Plan
*Premiums extracted from the premium table of a sample IP plan correct as at Apr 2022
(click above image to enlarge)
We can see that for Private Hospital Entitlement, premiums spike when someone crosses the Big 70. Premiums to be funded out of cash, after the maximum Medisave IP withdrawal limit, is $2,480 for the age 71-73 bracket. Just looking at this table, one may think that premiums to be paid above age 70, especially in the initial years after age 70, are still ‘affordable’. Well, think again.
This table here shows the premium one will pay in a certain age group, now. It has not taken into consideration increases in IP in the coming years, due to the three factors discussed above. While someone who is now 45-years-old may only have to a small amount pay out-of-pocket ($95) for private hospital coverage, he will very likely have to pay more than $2,480 in cash when he turns 71, in Year 2048. The question is, what quantum will the premiums be when he turns 71 years old? This is where we make an educated guess.
Between 2007 and 2017, Singapore’s average annual healthcare inflation was 2.6% compared to 2.3% for all goods and service. Assuming that IP premiums continue to increase at the same rate as annual healthcare inflation, and rounding up to 3% for ease of reference and computation, here is how the future premium table may look like for Private Hospital Entitlement.
Table 2: Premium Table of A Sample IP Plan With Inflation Projected at 3% p.a. – Private Hospital Entitlement
click above image to enlarge
- Assuming no changes to the CPF withdrawal limit for ISP
Looking at Table 2, at 3% compounded annual increase in premium, a 45-year-old, currently paying only $95 for Private Hospital Entitlement, may be staring at a premium of $6,389, to be funded from cash, when he turns age 71. When he hits his 80s, his premium to be funded from cash can be more than $10,000 a year. That is a hefty bill, at a stage where he is very likely relying on savings for retirement.
Start Inflation-Proofing Your Ip Premiums Now
While this may look like a bleak scenario, there are options financial planning wise on what you can do.
Here are 3 options to consider in managing the future IP premiums:
1. Give up IP at age 70 or whichever age at which premiums become unaffordable. This would not usually be a preferred option as an IP becomes more critical as we age, given the much higher likelihood of incurring medical expenses (and potentially some very large ones).
2. Downgrade to a lower-tier plan (from Private Hospital to Restructured Hospital Entitlement). While this has its merits in terms of a lower premium burden after age 70, the premiums will still be higher than what the 45-year old is paying now.
3. Continue to stay on the Private Hospital Entitlement with the increasing premiums to be funded from somewhere.
Table 3: Premium Table of A Sample IP Plan With Inflation Projected at 3% p.a. – Restructured Hospital Entitlement
click above image to enlarge
Let’s examine Option 2 as it appears appealing. Referring to Table 3, the 45-year old may be paying $1,873 – $3,756 annually in his 70s should he downgrade to Restructured Hospital Entitlement. The premium on the downgraded tier then accelerates to more than $5,000 in his late 80s. This is clearly a more affordable option compared to staying on the Private Hospital Entitlement, with some trade off in the coverage. Even then, the premiums still need to come from somewhere. How then, do we fund these increase in premiums with some sort of certainty, given that an IP is pretty much a necessity rather than a luxury?
For Option 3, the need to fund premiums at age 70 and above is even more pressing, given the huge increase in premiums which we have already discussed.
One way to do so may be to participate in an insurance income plan, with a payout over either a 10 or 20-year period, during the latter stages of life. For example, one can set up a plan to pay out from age 70 onwards, for a period of 10 years (refer to Table 4). The planned payout can be pegged to the out-of-pocket IP premium at the higher end of the age category. So, this person can target a payout amount equivalent to what his IP premium is estimated to be at age 80 ($9,684), leaving him with some buffer the previous few years, which he can use for his rider and deductible/co-insurance. The lump-sum premium, for such a plan with one of the major insurers in the market, is $30,000. He takes care of 10 years of IP premium in one swoop!
Table 4: Sample of an Insurance Payout Plan vs Private Hospital Entitlement at 3% Inflation Projected
click above image to enlarge
The issue of healthcare cost is a hot topic here in many countries across the world. In Singapore, many people recognise the importance of additional private healthcare coverage beyond Medishield Life, but few have prepared well for escalating IP premiums. This issue needs to be addressed, as we have demonstrated, IP premiums tend to be very expensive at an age when we will no longer be drawing a work income. Even if we decide to downgrade to a lower-tier IP, premiums in our golden years will still be substantially higher than now. We do not know how the landscape for healthcare cost and medical coverage will look like in the next few decades, but it will be foolish not to assume IP premiums will increase.
Prepare Early For Your Medical Needs Using Insurance Payout Plans
Time and tide wait for no man, so it is necessary for us to deal with the challenge of inflation-proofing IP premiums now and take concrete steps. Insurance payout plans, as shown, can provide a good assurance. There are so many permutations involved when laying the groundwork for mitigating increasing IP premiums. For example, you might want greater security and decide on a 20-year payout to mitigate the increase in premium.
To help you get started, you can download this “Guide to Insurance Payout Plans – For Integrated Shield Plans Premium Planning”. This guide will provide you with a list of factors to consider in choosing a suitable plan as well as a list of plans that I have personally curated that I find suitable to be use in the planning for future IP premiums.
Start early, plan for the IP premiums and the IP will in turn, take care of you!
Article by Leon Loh
The writer is a financial consultant representing GEN Financial Advisory Pte Ltd