You will be able to explain why disability income and personal accident cover matter more for the self-employed.
Ask a new freelancer which insurance they worry about most, and they usually say hospital bills. Then ask what happens if they break a wrist and cannot work for two months. The answer is often a long pause. A hospital bill is one cost, partly covered by national schemes. Two months with no income, while rent, insurance premiums and software subscriptions carry on, is a bigger hole for most self-employed people, and it is the one they plan for least.
An employee who falls ill gets paid sick leave. After that, many have hospitalisation leave, and some have group disability cover through their employer. For the first weeks, at least, a salary keeps arriving.
A self-employed person has none of that. Every week you cannot work is a week with no fees, and your costs do not pause. Rent, loan repayments, insurance premiums, phone bills and business subscriptions all carry on, and your MediSave and tax bills from earlier years can still arrive in the middle of it.
For most freelancers, then, the income that stops while you recover is a bigger financial risk than the hospital bill. Planning for it has three layers: your buffer, disability income insurance and personal accident cover.
The first line of cover for a short absence is cash. The holding account buffer from module 1 keeps paying your base pay while no new money comes in.
A freelancer usually needs a larger buffer than an employee, because there is no sick leave, no notice period and no retrenchment payment in front of it. Lesson 3.1 of The Singapore personal finance system, How big your emergency fund should be, explains how to choose the number of months. For a self-employed person, more months than an employee would hold is common.
To see how long yours lasts, divide the buffer by what you need each week while you are not working: your base pay plus the business costs that carry on.
Here is Mei's version, with figures made up for the example. Her buffer is S$13,800. Her base pay is S$2,300 a month and her business costs are S$300, so she needs S$2,600 a month. S$2,600 multiplied by twelve and divided by 52 is S$600 a week. S$13,800 divided by S$600 is 23 weeks, a little over five months.
Hafiz's numbers look different. He needs about S$600 a week for his personal spending, and his car rental costs S$400 a week whether he drives or not. That is S$1,000 a week. His buffer is S$6,000, so it lasts six weeks.
Disability income insurance pays a monthly benefit if illness or injury stops you working. It replaces part of your income, not all of it, and payments start after a waiting period set in the policy. Lesson 4.3 of The Singapore personal finance system, Critical illness and disability income cover, explains how these policies work, including the definitions of disability that decide when they pay.
For a self-employed person, a few points matter more than usual. Insurers need to see your income, so they will ask for evidence such as your notices of assessment. If your income is uneven, ask how they would work out the benefit. And the waiting period should match your buffer: if your buffer lasts five months, a waiting period of a few months fits, because the buffer carries you until the payments start.
Keep national schemes in proportion. CareShield Life pays for severe disability that affects daily activities, and it is designed for long-term care costs. It is not built to replace a working income during a recovery.
Personal accident cover pays out for injuries caused by accidents. Depending on the policy, it can pay for medical treatment after an accident, a lump sum for serious injuries, and in some policies a daily or weekly cash amount while you recover.
That cash benefit suits physical work. A delivery rider, a driver, a fitness trainer or a photographer carrying equipment faces a higher chance of injury than someone at a desk. A cash amount for each day of recovery can cover the costs that keep running, such as Hafiz's car rental.
Illness falls outside personal accident cover altogether, so a long bout of flu complications or a slipped disc from years at a desk falls to disability income cover and your buffer.
Lay the layers out on a timeline. The buffer carries the first weeks or months. Personal accident cover may pay for an injury during that time. If the absence runs past the waiting period, disability income insurance starts paying.
Mei's buffer lasts 23 weeks, so a short illness is covered. Beyond that, she has nothing yet. Hafiz's buffer lasts six weeks, and his work makes an accident more likely, so his gap opens much sooner. Neither has to buy anything today. Both now know where the timeline runs out.
Get your buffer balance and your weekly costs in front of you, and work out where your own timeline runs out.
Write how many weeks you could go without income before your buffer runs out, and what would pay after that.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).