FX Risk & Your Life Insurance Policy
One of the biggest risks, and often one of the most overlooked, for Australian expats is foreign exchange (FX) risk, particularly how this applies to personal insurance policies. Here I’m referring specifically to Life, Total & Permanent Disability, Critical Illness, and Income Protection policies.
As an Australian expat living and working abroad, managing your FX exposure can be a difficult and at times, overwhelming, exercise. Trying to work out which is the right currency to have exposure to with your investments, how to accumulate your property savings while you’re living abroad, what currency to have your retirement savings in, and of course, how this all relates to your personal insurance policies.
Let’s take a quick look at the currency movements just since the beginning of 2022:
- US Dollars (USD): Depreciation of 11.30%
- Euros (EUR): Appreciation of 3.45%
- British Pounds (GBP): Appreciation of 8.63%
- Singapore Dollars (SGD): Depreciation of 6.42%
These are significant swings in the currency pairs over a relatively short space of time, and if you think this is a one-off, or rare occurrence, given the volatility we’re seeing in the world at present, all you need to do is look back over time and realise that this is quite a regular occurrence.
What does all of this have to do with your personal insurance..?
The key link between the FX movements and your personal insurances is to decide which currency you should hold your personal insurance policies in. That is both which currency you should pay your premiums in, and which currency your policy pay-out should be in (often these have to be the same with the majority of insurers). Many Australian expats make the mistake of assuming that because they’re in Singapore, they should simply have their policy in Singapore Dollars (SGD) because this is what they’re earning, and replacing their income is one of the key purposes of the insurance policy to begin with, however in many cases this is entirely inappropriate.
Often it is far more sensible to consider the scenario of the event of a claim on your insurance policy, whether death or disability and consider how it would play out. Would your family return home in the event of your passing? Would you remain in Singapore? Would you receive treatment back in Australia? Would you want to be close to your extended family back home in Australia? Would you remain employed?
There are many questions and scenarios to address here, which is why it’s so important. If you had a Life Insurance policy in Australian Dollars (AUD) for example, that was largely to cover your children\'s school fees and mortgage in Singapore for A$1M, it’s now worth $64,200 less than it was at the start of the year.
Let’s explore each of the types of insurance and what you should consider
Life insurance provides a lump-sum benefit upon your death to ensure your family can maintain their current lifestyle. This can be used to pay funeral expenses, pay off an outstanding mortgage for the family home as well as other debts, provide education to your children and provide an ongoing income to maintain their day-to-day lifestyle. When it comes to FX considerations, it’s important to think about the following:
- Would your family remain in Singapore or would they return to Australia, or elsewhere?
- Is the mortgage that you’re covering in Australia, Singapore, or elsewhere?
- Where would your child or children continue their schooling in the event of your passing?
- Would your family be legally allowed to remain in Singapore if you were to pass?
- What currency would the funeral costs be paid out in?
- Are there any other debts that would need to be covered, and if yes, what currency would they need to be repaid in?
- Would your family need to buy a home in the event of your passing, and if so, in what currency would this be?
- Would your surviving spouse be able to work and generate a sufficient income to cover your family’s expenses? If not, would you need to provide a supplementary income for them, and if so, what currency should this be in?
Total & Permanent Disability Insurance (TPD)
Total & permanent disability (TPD) insurance provides you with a lump sum payment in the event you are permanently injured or disabled. This can be used to pay off any debts (e.g. mortgage), and assist with any medical costs and the costs associated with modifying your home or vehicle that may be required as a result of the injury. You can also use this as capital to assist in generating an income to meet your ongoing living expenses if you are no longer able to work for an income.
In most instances, similar questions should be considered to the Life policy, as it is highly unlikely that you would be returning to work in a meaningful capacity following a TPD claim. The important question here is where would you want to be based in the event of a TPD claim. Would you want to remain in Singapore, or would you prefer to repatriate to Australia?
Critical Illness Insurance
Critical Illness insurance provides you with a lump sum payment in the event you are diagnosed with a critical illness or injury (e.g. cancer, heart attack, or stroke; the insurer will have a list of specific illnesses that are covered). This can be used to pay off any debts (e.g. mortgage), assist with any medical costs, and supplement your income while you are unable to work.
When it comes to your Critical Illness coverage, often you are aiming to replace your income and living costs for a period of 12 – 24 months, while your health insurance hopefully covers the cost of any treatments that may be required. Ideally, the treatment will work, the critical illness payout will be sufficient to cover your expenses, and you can then return to work and your previous lifestyle before the claim took place. In some instances, it may be sensible to have this cover in your local currency if you believe you would stay in Singapore, for example, in the event of a claim to receive treatment and then hopefully go back to work.
If you feel that you would be more likely to repatriate to Australia for any treatment, and want to be nearby your family back at home, then this may make more sense to hold this policy in Australian Dollars (AUD) for example. Again, there is no one size fits all approach to the currency for Critical Illness insurance policies, as it’s a matter of going through the questions yourself.
Income Protection (IP)
Income protection (or salary continuance) cover provides you with an ongoing income in the event you are unable to work due to illness or injury to assist in maintaining your lifestyle needs. The amount should represent a maximum of 75% of your current income. You may find that more or less than this amount is sufficient for your needs.
Given that you are looking to replace your local income with this particular insurance policy, it is often most sensible to have the payout in your local currency. For example, if you are living and working in Singapore, and looking to replace your Singaporean income, then Singapore Dollars (SGD) may be the sensible currency to hold this policy in.
As you can see, there is a great deal to consider when it comes to the currency exposure of your insurance policies, and many providers will not allow you to change the currency once the policy is set up, so some prior planning is certainly wise here.
If you have any questions about your insurance policies or want to consider your currency risk, feel free to book in a complimentary discussion and we can explore possible solutions for you.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.
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