Basic Financial Planning Guide - 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 proposals apply to term life insurance policies, standard critical illness riders sold with term life insurance, and standard standalone critical illness policies.
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.
Protection Gap - 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.
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.
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 dependents where applicable.
Terms & Conditions - 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.
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.
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.
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.
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.
Regulations - 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. 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.
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.
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.
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 dependents where applicable.
Terms & Conditions - 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.
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.
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.
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.
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.
Regulations - 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. 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.
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