Why people buy insurance—and what insurers are really after

Insurance is often described as a safety net. But it’s more accurate to call it a planning tool. For Singaporeans juggling CPF contributions, housing loans, caregiving duties, and aging parents, insurance serves less as a luxury than a quiet necessity. Still, the question lingers: Why do people really buy insurance—beyond just peace of mind? And on the other side, what’s in it for insurers? The answers reveal not just policy mechanics but the values and tradeoffs embedded in modern financial life.

The reasons Singaporeans purchase insurance tend to follow predictable patterns—but the timing and urgency often depend on personal experiences. Here are the most common motivating factors:

1. The Life Stage Realization

You may go most of your 20s thinking little of insurance—until your first hospital visit, your parent’s heart surgery, or the arrival of your child. That’s when questions emerge:

• Is MediShield Life enough?
• What happens if I can’t work for six months?
• Can my family stay in our HDB if I’m gone?

Most people don’t buy insurance out of curiosity. They buy it after clarity strikes.

2. Gaps in Existing Protection

While CPF and MediShield Life provide a strong foundation, they don’t cover all situations:

• MediShield Life is capped at B2/C ward charges in public hospitals.
• Work insurance typically ends when employment ends.
• There’s no default disability income protection unless one actively purchases it.

These limitations become visible only during financial planning or medical emergencies—making insurance less of a sales product and more of a strategic gap-filler.

3. Dependents and Income Replacement

Term life and disability income insurance serve one clear purpose: protecting those who rely on you. This includes:

• Young children whose education depends on your salary
• Spouses who manage the home economy
• Elderly parents requiring medical care or living support

It’s not about your life per se—it’s about what your income sustains. Insurance acts as a continuity plan.

4. Emotional Drivers: Guilt, Fear, Legacy

Singaporeans don’t talk about this openly—but emotional triggers matter:

• Guilt for not being “prepared enough” if something happens
• Fear of burdening family financially
• A desire to leave a meaningful legacy or financial support

These are not irrational. They reflect deeply held cultural values—filial piety, financial responsibility, and planning ahead.

Insurance buying is not just a financial decision. It’s a behavioral pattern shaped by:

• Social influence: Friends who recently claimed hospital insurance are powerful motivators.
• Policy push: National campaigns like CareShield Life opt-ins bring attention to coverage gaps.
• Agent relationships: Many Singaporeans still rely on family-linked agents to recommend products—sometimes appropriately, sometimes overzealously.

That’s why uptake tends to spike after big campaigns, media reports on critical illness, or new public-private product launches.

Let’s demystify the most popular categories of insurance and what they’re actually designed for:

1. Hospital and Surgical Insurance (Integrated Shield Plans)

• What it covers: Private or public hospital charges above MediShield Life limits
• Use case: Supplementing state-provided healthcare, faster access to specialists
• Common gap: Premiums rise with age; many drop coverage at retirement without a plan

2. Critical Illness Insurance

• What it covers: Lump sum upon diagnosis of conditions like cancer, stroke, or heart attack
• Use case: Covers recovery period, non-medical costs (e.g., loss of income, alternative therapies)
• Common gap: Many are underinsured, with payouts insufficient for extended recovery

3. Disability Income Insurance

• What it covers: Monthly payouts when unable to work due to illness or injury
• Use case: Income replacement for working adults
• Common gap: Not commonly bought—yet one of the most financially devastating risks

4. Term and Whole Life Insurance

• What it covers: Lump sum payout on death or terminal illness
• Use case: Income replacement, estate planning
• Common gap: People overpay for bundled investment plans instead of lean term coverage

5. General Insurance (Travel, Motor, Home)

• What it covers: Event-based financial losses like theft, accidents, or trip disruptions
• Use case: Risk transfer for one-time events
• Common gap: Often bought reactively, not preemptively

Each product category has its purpose—but the real risk lies in buying based on brand trust or emotion, not need-fit alignment.

Now let’s switch perspectives. Insurance companies do not exist purely to “protect” consumers. They are financial institutions with structured objectives, bound by regulation and profit mandates.

Here’s what they’re really optimizing for:

1. Risk Pooling and Predictability

Insurance only works when many pay and few claim. That’s the basic model:

• Insurers collect premiums from a wide base
• They invest those premiums for returns
• They pay out claims using statistical probabilities, not personal need

This is why:

• Young, healthy clients are highly prized
• Claim frequency must be tightly controlled
• Premium pricing must match long-term liabilities

It’s not personal—it’s actuarial math.

2. Capital Reserves and Financial Strength

Insurers in Singapore are regulated by MAS to maintain capital adequacy ratios and solvency buffers. This ensures:

• Payout capacity even during pandemics or economic shocks
• Long-term sustainability of legacy policies
• Public confidence in the system

If a single insurer fails to honor claims, the reputational risk affects the entire sector. That’s why MAS regularly stress-tests the industry and enforces capital rules strictly.

3. Behavioral Nudging

Many modern insurance products include features that encourage safer, healthier behavior:

• No-claim discounts in car insurance
• Wearable-linked health score rebates
• Gamified savings incentives for bundling plans

These behavioral nudges serve two goals:

• They reduce actual risk exposure (e.g., fewer accidents, healthier clients)
• They increase policyholder retention through engagement

Insurers don’t just manage money—they try to shape behavior.

4. Market Share and Product Stickiness

Insurance products are increasingly designed for cross-sell and upsell potential:

• A term life policy can lead to a savings-linked whole life upgrade
• A travel policy app may cross-promote car or health insurance

The goal: make switching inconvenient and increase “customer lifetime value.” This means policies sometimes favor long-term lock-ins, which can conflict with consumer flexibility. That tension is strategic, not accidental.

Most people don’t realize this, but premiums aren’t just based on coverage type. They’re based on:

• Age and health: Older and less healthy individuals pay more—or may be excluded
• Occupation and lifestyle: Riskier jobs or hobbies trigger premium loadings
• Claims history: More claims = higher future premiums

Some insurers also apply moratorium underwriting, which accepts pre-existing conditions under strict non-claim conditions. Others require full health declarations. So while insurance is often marketed with “affordable from $X/month” slogans, the actual pricing mechanism is complex, risk-weighted, and designed to avoid surprises—for the insurer.

Singapore’s insurance landscape blends public and private mechanisms:

• MediShield Life: A basic public health insurance plan for all citizens and PRs
• CareShield Life: A compulsory long-term disability insurance scheme for those born after 1980
• ElderShield (legacy): The predecessor to CareShield, now being phased out
• Integrated Shield Plans: Private add-ons to MediShield, covering higher ward classes or private hospitals
• Income Protection Riders: Offered through CPF or workplace benefits

The government plays three key roles:

1. Baseline coverage: Ensuring all Singaporeans have minimum protection
2. Framework regulation: Setting rules for solvency, fair practices, and policy clarity
3. Incentivized behavior: Through tax reliefs (e.g., SRS contributions) or mandatory schemes

This hybrid model keeps insurance coverage broad-based, yet allows individual tailoring.

Unlike the US, where health insurance is employer-linked and privatized, or the UK, where the NHS covers all citizens, Singapore’s model is:

• Mandatory for basics
• Optional for upgrades
• Highly individual in top-up choices

Compared to Malaysia or Indonesia, Singapore has far higher insurance penetration—especially in health and life products. But compared to countries with universal income protection schemes (e.g., Nordic nations), Singaporeans must shoulder more self-directed planning. This explains why financial literacy campaigns, workplace seminars, and insurance advisors play a larger role in personal protection decisions here.

Buying insurance doesn’t have to be a confusing or pressured decision. The real task is alignment.

Here’s a basic framework:

1. Coverage vs. Cost: Are you overpaying for bells and whistles you won’t use?
2. Purpose Fit: Is this plan for income replacement, health recovery, or legacy planning?
3. Time Horizon: Does this coverage last until the need ends—or end before the risk does?
4. Liquidity Impact: Are the premiums affecting your emergency savings or investing plans?

One powerful question to ask: “If I never claim on this policy, will I still be glad I had it?”
If the answer is yes, the product is probably doing its job.

At the end of the day, insurance is not a financial product you use frequently. It’s one you hope you never need—but are deeply grateful for when you do. For individuals, it’s about protecting your plan. For insurers, it’s about pricing uncertainty. For society, it’s a stabilizing force that prevents families from falling through the cracks.

Understanding these different objectives brings clarity to an otherwise opaque topic. Insurance is not a promise. It’s a system—one that works best when built on informed choices, aligned incentives, and long-term trust.