Explain why disability income cover and personal accident cover matter more when you are self-employed.
If you work for yourself, illness or injury usually costs you more through the fees you stop earning while you recover than through the hospital bill. You can guard that income with three layers of protection: a cash buffer of your own, disability income insurance, and personal accident cover.
Most people new to freelancing say hospital bills are what worries them most about insurance. Ask them what they would live on if a broken wrist kept them from working for two months, and many cannot say. The hospital bill arrives once, and national schemes pay part of it. For most self-employed people, two months of earning nothing while the usual costs keep going out is the larger hole in their finances, and it is also the one they plan for least.
Someone on a payroll who falls ill has paid sick leave to draw on, and many can move on to hospitalisation leave once that runs out. Some are also covered by a group disability policy through their employer. For at least the first weeks of an illness, their salary carries on arriving.
None of that applies when you are self-employed. A week off sick is a week with no fees coming in. Meanwhile rent, loan repayments, insurance premiums, phone bills and business subscriptions still have to be paid, and MediSave bills or tax bills for earlier years can land while you are not earning.
The first layer is cash, specifically the holding account buffer you set up in module 1. When no new money is arriving, it goes on paying your base pay, which makes it your first line of cover for a short absence. Nothing sits in front of it (no sick leave, no notice period, no retrenchment payment), so a freelancer usually needs a bigger buffer than an employee does, and self-employed people commonly hold more months of it. To decide how many months yours should cover, see Lesson 3.1 of The Singapore personal finance system, "How big your emergency fund should be".
How long your buffer lasts comes from one division: the buffer divided by your weekly need, which is your base pay plus whichever business costs carry on while you are not working. When your figures are monthly, turn them into weekly ones by multiplying by 12 and dividing by 52.
Mei is self-employed and has S$13,800 in her buffer (an example figure). She pays herself a base of S$2,300 a month, and her business costs come to S$300 a month. Together that is S$2,300 + S$300 = S$2,600 a month. Converted to weekly, S$2,600 x 12 / 52 = S$600 a week. Dividing her buffer by that gives S$13,800 / S$600 = 23 weeks, a little over five months. She can get through a short illness, but past 23 weeks nothing covers her yet.
Hafiz is also self-employed and works using a rented car, so he is more likely than Mei to have an accident. His personal spending is about S$600 a week, and the car rental is S$400 a week whether or not he is driving. That puts his weekly need at S$600 + S$400 = S$1,000 a week. With S$6,000 in his buffer, S$6,000 / S$1,000 gives him six weeks, so his gap opens much sooner than Mei's does.
The second layer, disability income insurance, pays you a monthly benefit when illness or injury stops you working. It makes up part of your income and never the whole of it. The benefit starts only after a waiting period set by the policy, and when it pays depends on how the policy defines disability. Lesson 4.3 of The Singapore personal finance system, "Critical illness and disability income cover", goes through how those definitions work.
Match the waiting period to the length of your buffer. A buffer that lasts five months sits well with a waiting period of a few months, since the buffer pays your way until the benefit begins.
An insurer will want proof of what a self-employed person earns, so keep evidence such as your notices of assessment ready. If your income goes up and down from month to month, ask the insurer how they would work out your benefit.
CareShield Life may come up as well. This national scheme pays out for severe disability that affects daily activities. It is built for long-term care costs and is not meant to replace your working income while you recover, so give it little weight in this plan.
The third layer is personal accident cover, which pays for injuries caused by accidents. The exact payout depends on the policy. It may pay for medical treatment after an accident and a lump sum if the injury is serious, and some policies add a cash amount for each day or week you spend recovering.
That cash amount is most useful if your work is physical. Delivery riders, drivers, fitness trainers and photographers who carry equipment get injured more often than people who work at a desk. In Hafiz's case, a daily cash payment while he recovered could cover his car rental. If your own work is physical, look at policies that include a daily or weekly cash benefit.
Illness falls entirely outside personal accident cover. Complications from a long bout of flu, or a slipped disc after years of desk work, are not accidents, so your buffer and disability income insurance have to handle them.
Think of the weeks after you stop working as a single line. The buffer pays for the first weeks or months. An injury during that stretch may also bring in money from personal accident cover. Once your time off goes past the waiting period, disability income insurance begins to pay.
Mei and Hafiz do not need to buy anything today. Each can now see where their timeline runs out: for Mei at 23 weeks, for Hafiz at six weeks.
Get your buffer balance and your weekly costs in front of you, and work out where your own timeline runs out.
Work out how many weeks you could go with no income before your buffer runs out. Then write down what would pay your bills after that.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).