HPS, DPS and a Self-Employed Gap
Mr Tan, 39, is a self-employed renovation contractor with variable income averaging $120,000 a year. His wife is 36 and they have two children aged six and three. Their HDB flat has an outstanding loan of $480,000, serviced from his CPF Ordinary Account balance of $90,000. They hold $120,000 cash, $60,000 in a balanced unit trust and $70,000 in a Dependants' Protection Scheme policy. Mr Tan has Home Protection Scheme cover with an annual premium of $1,800, but only MediShield Life for hospitalisation. He asks whether he should cancel HPS to save the premium and buy a $500,000 term policy to age 65 instead. He also wants to know if DPS is enough for his family, and whether he needs disability income cover given that a back injury kept him off work for three months last year.
1. Should Mr Tan cancel HPS and replace it with a $500,000 term policy?
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HPS is a reducing mortgage cover, and its premium is paid from CPF Ordinary Account, so cancelling it saves OA rather than household cash. It specifically protects the outstanding HDB loan on death or permanent incapacity, and if Mr Tan later develops a health condition, reinstatement may be refused. A $500,000 level term policy is useful because it covers more than the mortgage and can provide family income, but it is not a reason to cancel HPS outright. The better approach is to keep HPS and add term cover, unless the total death/TPD cover is clearly excessive after a full needs analysis. If he does cancel, he must first secure alternative cover and understand that HPS has no cash value and no medical underwriting in the same way. The decision should be recorded in writing.
2. Size Mr Tan's death/TPD and disability needs, stating the assumptions you use.
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A common starting point is 10 times income, or $1.2 million, for a 39-year-old with two young children and a non-earning spouse. Against that, deduct the $70,000 DPS, the $60,000 unit trust and available CPF savings, leaving roughly $1 million of cover before considering the mortgage. The $480,000 HDB loan is a specific liability, so HPS or term cover should match it. For disability, Mr Tan needs replacement of about 75% of income, or $90,000 a year, because a back injury already caused three months off work. DPS pays a fixed $70,000 on death, terminal illness or permanent incapacity, which is a small lump sum relative to future earnings. CareShield Life only responds to severe disability and pays a modest monthly benefit. He should consider disability income insurance to age 65 with a 90-day waiting period, plus a larger emergency fund because his income is variable.
3. Recommend an implementation sequence that addresses hospitalisation, death/TPD and disability cover without over-insuring.
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First, secure the health foundation: keep MediShield Life and consider an Integrated Shield Plan appropriate to his budget, because a hospital stay can disrupt a self-employed household's cash flow. Second, keep HPS and add level term cover for the shortfall, using a sum assured that includes the mortgage, children's education and several years of household expenses. Third, add disability income cover, since death cover does not pay while he is alive but unable to work. Fourth, build the emergency reserve to at least six months of fixed expenses, given variable income. Review the unit trust and cash allocation only after protection is in place. Avoid overlapping policies that pay the same benefit for the same event, and check whether the term policy includes TPD and critical illness as optional benefits rather than buying separate duplicates.