Oct 2021
On 25 August 2021, the IA’s research team published the findings for its first Mortality Gap Study (the “Study”). These findings showed that there is a “mortality protection gap” in Hong Kong.
In Policyholder Corner, we explain what this means to you, the policyholder.
So what is a mortality protection gap?
Under the terms of a life insurance policy, a policyholder pays premium to an insurance company and, in return, when the policyholder dies the insurance company makes a lump-sum payment to the policyholder’s beneficiaries (e.g. their spouse or other family members), which they can use for financial support. This is the core purpose of life insurance: to provide sufficient financial support for your dependents (your family) when you die.
If you have a mortality protection gap, it means that when you die your life insurance payout together with your other savings and investments are not going to be sufficient to financially support your dependents.
If you have a mortality protection gap, therefore, it means you may not have sufficient life insurance cover (e.g. the death benefit under your life insurance is not enough to financially sustain your dependents if you die).
What does the IA’s Study tell us about the mortality protection gap?
This means there is an estimated HK$6.9 trillion shortfall between (a) the total financial amount that all the working adults in Hong Kong need to financially support their dependents; and (b) the savings, investments and life insurance that working adults in Hong Kong actually have to support their dependents when they die.
This translates into an average shortfall of HK$1.9 million per working adult.
Does this mean I need to increase the coverage under my life insurance policy by HK$1.9 million?
Not exactly, HK$1.9 million is only the average. It is worth considering, however, whether you have sufficient life insurance to ensure your dependents will be adequately supported when you die.
Also remember this: the amount of the life insurance protection you need changes throughout the course of your life as your personal circumstances change. It depends on factors like: what stage of life you have reached, how old you are, whether you are married or in a relationship or have children (and how old they are), or have parents to take care of, or whether you have a mortgage etc.
Can you give an example of how a person’s mortality protection gap (and hence life insurance needs) changes during the course of one’s life?
Sure, let’s take my friend Teddy as an example and look at his different stages of life.
Teddy in his twenties…
When Teddy graduated from university in this twenties, he started work as a trainee auditor. He was single and his parents were still working. Life was good. At this stage of his life, Teddy’s protection needs were limited to covering the financial support he would need to provide his parents after they retired if, sadly, Teddy passed away prematurely in his twenties (and hence was unable to provide that support when his parents reached retirement).
Teddy in his thirties…
In his thirties, Teddy met Sharon. They dated, they fell in love and they got married (very romantic). Next thing you know (well nine months later) Charles, their son was born. Two years later, they had a daughter named Ella. Sharon gave up work to take care of the two children (and their pet dog). Teddy bought a bigger apartment for his family which meant him taking on a sizable mortgage loan. His parents, who had now retired, moved in with them.
At this stage of his life, Teddy’s life insurance protection needs reached their peak. He had a number of dependents relying on his income to support them, but not much in the way of savings and investments (as he was still at a relatively early stage in his career and savings and investments take time to build up). If Teddy died at this time in his life, his mortality protection gap would have been sizeable, if he did not have sufficient life insurance protection.
Teddy in his forties …
In his forties, Teddy was promoted to partner in his accountancy firm. His income, savings and investments started to increase. Although he still had a number of dependents (his children, his wife and his parents), his mortality protection gap and life insurance needs started to reduce. Why? Because if Teddy died at this stage in his life, his savings and investments (which by this time, after some years, had started to build and grow) would make some contribution to financially sustaining his dependents. Also, Teddy had been able to pay down a large part of his mortgage loan through the accumulated repayments he had made.
Teddy in his fifties…
In his fifties, Teddy’s parents unfortunately passed away. Sad though this was, it reduced Teddy’s life insurance needs still further, as it reduced the number dependents he had. His life insurance needs reduced even further when Sharon, his wife, decided to go back to work. But Teddy still had his children, Ella and Charles to think of as they both entered university.
Teddy in his sixties…
As Teddy entered his sixties, Charles and Ella graduated and entered the job market. They were no longer dependent on their parents. By the time Teddy retires at 65, therefore, Teddy’s savings, investments, pension and the fact that his dependents are off his hands, means that his life insurance protection needs have reduced to zero.
This example shows how, generally, the amount of life insurance protection a person needs changes substantially during the person’s lifetime. Generally, it increases when you are younger and are acquiring responsibilities (i.e. dependents). It then peaks (as it did for Teddy in his mid-thirties) and then starts to decrease over time as a person’s savings and investment increase and the number of their dependents reduces (e.g. children growing up and becoming self-reliant).
But isn’t there a lot of life insurance already bought in Hong Kong? How come there is still a mortality protection gap?
Life insurance policies have evolved over the years to serve multiple different needs. In addition to offering core life insurance protection (i.e. a lump sum payout to your dependents when you die), many life insurance policies are now combined with savings and investment elements to cater for wealth accumulation and financial planning. These are, in fact, the most common life insurance policies bought in Hong Kong (and indeed many of the complaints we receive are about life insurance products with savings and investment elements).
Both pure life insurance protection and savings/ investments are relevant to the question of how your family would be sustained if you die (which is part of the reason life insurance products have evolved to include both life insurance protection and savings/investment elements). However, there may be a tendency to focus too much on the savings and investment elements of a life insurance policy during the buying process, rather than the core life insurance protection which the policy provides. This may result in an individual not having sufficient core life insurance protection. Even though significant amounts are spent of life insurance premium in Hong Kong, therefore, it remains the case that there is a mortality protection gap, on average, of HK$1.9 million per person.
What are key lessons should consumers learn from the Study?
The key lesson for consumer are this:
Always remember the core purpose of life insurance: to ensure that your dependents are financially sustained when you die. When buying life insurance, this should be your primary focus.
If the life insurance policy you are considering has a savings or investment element, do not only focus on this element. It is also important that you consider whether the actual life insurance protection the policy provides is sufficient for you both at the time you buy and throughout the course of your life. In particular, it can take many years for the savings and investment element of your policy to accumulate and grow. During this period, you also need to ensure you have sufficient life insurance protection to support your family in the event of your premature death. If you are buying life insurance through an intermediary, always make sure you ask for advice about this.
The amount of life insurance protection you need changes throughout your life, depending on how your individual circumstances change, the number of dependents you have and how much in savings and investments you have (as well as other factors). So it is important to regularly review your life insurance needs as your life changes.
Always remember, a knowledgeable consumer is an empowered consumer. The more you understand your own needs, the better your purchase will be.
Where can I learn more?
The IA’s full report on the mortality protection gap can be found on our website.