Managing Your Finances During a Serious Illness

Reviewed Apr 26, 2017

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Summary

  • Planning can lessen the blow.
  • Let someone you trust know how to access your accounts and retrieve your key documents.
  • When illness happens, it is essential to find out your benefits and rights.

When you are diagnosed with a serious illness, money is probably the last thing you want to think about.

That’s why you should act while your health is still good to avoid money trouble that can be foreseen and prevented. It is better to be ready when poor health strikes. But if you are not, there are things you can do to protect your money and ensure a better future for you and your loved ones.

Here are steps you should take before and during an illness.

Create a financial cushion

Set aside a rainy-day fund, typically matching three to sux months of your expenses. (If you’re the sole breadwinner, you may want to save more). This may take time, but it’s worth doing for many reasons, not all related to health. The money will come in handy if you lose your job, for instance. In case of sickness, it fills the gaps left by any disability payments, which don’t start right away.

This money should be in a safe place. A checking or savings account is a good choice.

Look at your life insurance policy to see if it has riders that can give you income if you’re ill and not able to work. Three of these add-ons can be especially helpful. One is waiver of premium, which lets you skip premium payments when you’re ill and out of work. Another is the accelerated death benefit, which pre-pays you part of your death benefit based on the length and severity of your illness. A third is critical illness coverage, which pays a lump sum for certain listed illnesses.

What if your plan doesn’t have these riders? “In most cases you can’t add a rider to an existing policy,” says Steve Cagnassola, a financial advisor in Netcong, New Jersey. But he says you may save money by cancelling a current plan and shopping for a new one. New mortality tables adopted by insurers in 2010 reduced the cost of plans, and switching from a pre-2010 policy may be a deal even with the added riders. “Nine times out of 10, if you are in equally good health you can get a policy for less,” he says.

Critical illness coverage can also be bought as a stand-alone policy. Check with your employer or insurance agent to see what’s available.

Another potential source of funds is home equity. You may be able to borrow against the value of your home either through a lump-sum loan or a line of credit, in which you borrow only what you need when you need it.

Find, secure and share your vital information

Assume that you won’t be able to handle your finances (or much else) when you’re ill. Then plan accordingly. Make a list of your bank and investment accounts and how to reach them online; write down URLs, usernames, and passwords. Keep this information up to date, and share it with someone you trust. Make a similar list of critical phone numbers. These should cover not just money matters but everything else people may need to help you when you’re sick—from babysitters and doctors to attorneys and the human resources department at work.

Also, check and (if needed) update the documents that let others act on your behalf if you are not able to do so. You should have a durable power of attorney designating someone to handle your finances. You also need to name someone to make decisions about your health care through another document, the durable power of attorney for health care. This can be drawn up along with a “living will,” which spells out your wishes for the level and type of care you want if you are seriously or terminally ill. Make sure that all the people named to act in your behalf—including those listed as back-ups if the primary parties aren’t available—know what their duties are and are willing to carry them out.

All records and lists should be stored in a safe place. The Financial Planning Association suggests buying a fireproof box that you can keep safely in your home. Make sure that a trusted person has access to the records here and, if you have one, your safe deposit box at the bank.

Know your rights and benefits

Contact your employer’s human resources department to find out about disability benefits. Ask HR if your state has disability insurance that might cover you. Also, find out if you are covered by the federal Family and Medical Leave Act, which entitles workers to up to 12 weeks of unpaid leave per year for a number of reasons, including an illness that keeps you from working. A U.S. Department of Labor website (see “Resources” below) has details on who is qualified and what to expect.

Now is the time, if you haven’t done so already, to take a close look at your health insurance policy. Read it from cover to cover, says Travis Freeman, a certified financial planner and financial educator in St. Louis, Missouri. “There’s really nothing in this country that teaches us about health insurance,” he says, so you have to do your own homework. Knowing the details of your plan will help prevent costly errors—such as overpaying for services or paying for a covered service by mistake. “The only way you would find out about these things is just reading through the contract,” Freeman says.

Update your budget

It’s close to certain that you’ll spend more on medical care. You likely will spend less on activities, such as travel and eating out, that you pursued when you were in good health. You face a loss of some income, though how much depends on your disability plan and whether you have a working partner. Faced with all these changes, you need to update your family budget to make your money last.

If you have been keeping track of your spending by category, look at the past year to see what expenses will remain and which are likely to change. If you don’t have detailed records, try to guess as close as you can with the help of your checkbook and credit card bills.

If you still need cash, your Roth IRA or 401(k) may help

Retirement accounts are not all the same when it comes to withdrawals. In general, it’s best to keep this money in those accounts so that you’ll have it when you retire. But if you need cash now and your other savings are too slim to cover your costs, you may be able to tap into a Roth IRA without a large tax penalty. Unlike a traditional IRA (or a 401(k)), contributions to a Roth IRA come from income that has already been taxed. This part of your account is not subject to taxes and penalties if you withdraw it early—only the investment earnings are. So if you’ve added $20,000 to a Roth IRA and the account is now worth $30,000, two-thirds of your withdrawal is tax-free.

You can also withdraw funds from a traditional IRA without the 10 percent penalty if the money goes to pay health care costs that are more than 10 percent of your adjusted gross income (AGI). For instance, if your AGI is $50,000 and you have $7,000 in unreimbursed medical bills in the same tax year, you can take $2,000 from your IRA to pay those bills.

There’s a similar medical-cost exemption for withdrawals from 401(k)s. But a 401(k) loan gives you more options. You can use the borrowed money as you see fit, and the loan is tax-free even if your bills fall short of the 10 percent threshold. On the down side, you must start paying back the loan right away, and your employer can demand full repayment if you leave your job. But, says Freeman, “if you have to find money somewhere, the home equity loan and the 401(k) loan are the two I would recommend first.”

Resources

To learn more about the Family and Medical Leave Act, go to the U.S. Department of Labor’s website at http://www.dol.gov/whd/fmla/.

For a serious-illness planning checklist from the Financial Planning Association, go to http://www.fpanet.org/LifeCrisis/PreparingforaDisaster/IfYouHadtheTimetoPlanforaSuddenSeriousIllness/

The IRS has details on the rules on early distributions from qualified plans such as 401(k)s at http://www.irs.gov/taxtopics/tc558.html. 

By Tom Gray
Source: Steve Cagnassola, President, Complete Future Planning, Netcong, NJ; Saul M. Simon, CFP®, Simon Financial Group, Edison, NJ; Travis Freeman, CFP®, Four Seasons Financial Education, St. Louis, MO; Financial Planning Association

Summary

  • Planning can lessen the blow.
  • Let someone you trust know how to access your accounts and retrieve your key documents.
  • When illness happens, it is essential to find out your benefits and rights.

When you are diagnosed with a serious illness, money is probably the last thing you want to think about.

That’s why you should act while your health is still good to avoid money trouble that can be foreseen and prevented. It is better to be ready when poor health strikes. But if you are not, there are things you can do to protect your money and ensure a better future for you and your loved ones.

Here are steps you should take before and during an illness.

Create a financial cushion

Set aside a rainy-day fund, typically matching three to sux months of your expenses. (If you’re the sole breadwinner, you may want to save more). This may take time, but it’s worth doing for many reasons, not all related to health. The money will come in handy if you lose your job, for instance. In case of sickness, it fills the gaps left by any disability payments, which don’t start right away.

This money should be in a safe place. A checking or savings account is a good choice.

Look at your life insurance policy to see if it has riders that can give you income if you’re ill and not able to work. Three of these add-ons can be especially helpful. One is waiver of premium, which lets you skip premium payments when you’re ill and out of work. Another is the accelerated death benefit, which pre-pays you part of your death benefit based on the length and severity of your illness. A third is critical illness coverage, which pays a lump sum for certain listed illnesses.

What if your plan doesn’t have these riders? “In most cases you can’t add a rider to an existing policy,” says Steve Cagnassola, a financial advisor in Netcong, New Jersey. But he says you may save money by cancelling a current plan and shopping for a new one. New mortality tables adopted by insurers in 2010 reduced the cost of plans, and switching from a pre-2010 policy may be a deal even with the added riders. “Nine times out of 10, if you are in equally good health you can get a policy for less,” he says.

Critical illness coverage can also be bought as a stand-alone policy. Check with your employer or insurance agent to see what’s available.

Another potential source of funds is home equity. You may be able to borrow against the value of your home either through a lump-sum loan or a line of credit, in which you borrow only what you need when you need it.

Find, secure and share your vital information

Assume that you won’t be able to handle your finances (or much else) when you’re ill. Then plan accordingly. Make a list of your bank and investment accounts and how to reach them online; write down URLs, usernames, and passwords. Keep this information up to date, and share it with someone you trust. Make a similar list of critical phone numbers. These should cover not just money matters but everything else people may need to help you when you’re sick—from babysitters and doctors to attorneys and the human resources department at work.

Also, check and (if needed) update the documents that let others act on your behalf if you are not able to do so. You should have a durable power of attorney designating someone to handle your finances. You also need to name someone to make decisions about your health care through another document, the durable power of attorney for health care. This can be drawn up along with a “living will,” which spells out your wishes for the level and type of care you want if you are seriously or terminally ill. Make sure that all the people named to act in your behalf—including those listed as back-ups if the primary parties aren’t available—know what their duties are and are willing to carry them out.

All records and lists should be stored in a safe place. The Financial Planning Association suggests buying a fireproof box that you can keep safely in your home. Make sure that a trusted person has access to the records here and, if you have one, your safe deposit box at the bank.

Know your rights and benefits

Contact your employer’s human resources department to find out about disability benefits. Ask HR if your state has disability insurance that might cover you. Also, find out if you are covered by the federal Family and Medical Leave Act, which entitles workers to up to 12 weeks of unpaid leave per year for a number of reasons, including an illness that keeps you from working. A U.S. Department of Labor website (see “Resources” below) has details on who is qualified and what to expect.

Now is the time, if you haven’t done so already, to take a close look at your health insurance policy. Read it from cover to cover, says Travis Freeman, a certified financial planner and financial educator in St. Louis, Missouri. “There’s really nothing in this country that teaches us about health insurance,” he says, so you have to do your own homework. Knowing the details of your plan will help prevent costly errors—such as overpaying for services or paying for a covered service by mistake. “The only way you would find out about these things is just reading through the contract,” Freeman says.

Update your budget

It’s close to certain that you’ll spend more on medical care. You likely will spend less on activities, such as travel and eating out, that you pursued when you were in good health. You face a loss of some income, though how much depends on your disability plan and whether you have a working partner. Faced with all these changes, you need to update your family budget to make your money last.

If you have been keeping track of your spending by category, look at the past year to see what expenses will remain and which are likely to change. If you don’t have detailed records, try to guess as close as you can with the help of your checkbook and credit card bills.

If you still need cash, your Roth IRA or 401(k) may help

Retirement accounts are not all the same when it comes to withdrawals. In general, it’s best to keep this money in those accounts so that you’ll have it when you retire. But if you need cash now and your other savings are too slim to cover your costs, you may be able to tap into a Roth IRA without a large tax penalty. Unlike a traditional IRA (or a 401(k)), contributions to a Roth IRA come from income that has already been taxed. This part of your account is not subject to taxes and penalties if you withdraw it early—only the investment earnings are. So if you’ve added $20,000 to a Roth IRA and the account is now worth $30,000, two-thirds of your withdrawal is tax-free.

You can also withdraw funds from a traditional IRA without the 10 percent penalty if the money goes to pay health care costs that are more than 10 percent of your adjusted gross income (AGI). For instance, if your AGI is $50,000 and you have $7,000 in unreimbursed medical bills in the same tax year, you can take $2,000 from your IRA to pay those bills.

There’s a similar medical-cost exemption for withdrawals from 401(k)s. But a 401(k) loan gives you more options. You can use the borrowed money as you see fit, and the loan is tax-free even if your bills fall short of the 10 percent threshold. On the down side, you must start paying back the loan right away, and your employer can demand full repayment if you leave your job. But, says Freeman, “if you have to find money somewhere, the home equity loan and the 401(k) loan are the two I would recommend first.”

Resources

To learn more about the Family and Medical Leave Act, go to the U.S. Department of Labor’s website at http://www.dol.gov/whd/fmla/.

For a serious-illness planning checklist from the Financial Planning Association, go to http://www.fpanet.org/LifeCrisis/PreparingforaDisaster/IfYouHadtheTimetoPlanforaSuddenSeriousIllness/

The IRS has details on the rules on early distributions from qualified plans such as 401(k)s at http://www.irs.gov/taxtopics/tc558.html. 

By Tom Gray
Source: Steve Cagnassola, President, Complete Future Planning, Netcong, NJ; Saul M. Simon, CFP®, Simon Financial Group, Edison, NJ; Travis Freeman, CFP®, Four Seasons Financial Education, St. Louis, MO; Financial Planning Association

Summary

  • Planning can lessen the blow.
  • Let someone you trust know how to access your accounts and retrieve your key documents.
  • When illness happens, it is essential to find out your benefits and rights.

When you are diagnosed with a serious illness, money is probably the last thing you want to think about.

That’s why you should act while your health is still good to avoid money trouble that can be foreseen and prevented. It is better to be ready when poor health strikes. But if you are not, there are things you can do to protect your money and ensure a better future for you and your loved ones.

Here are steps you should take before and during an illness.

Create a financial cushion

Set aside a rainy-day fund, typically matching three to sux months of your expenses. (If you’re the sole breadwinner, you may want to save more). This may take time, but it’s worth doing for many reasons, not all related to health. The money will come in handy if you lose your job, for instance. In case of sickness, it fills the gaps left by any disability payments, which don’t start right away.

This money should be in a safe place. A checking or savings account is a good choice.

Look at your life insurance policy to see if it has riders that can give you income if you’re ill and not able to work. Three of these add-ons can be especially helpful. One is waiver of premium, which lets you skip premium payments when you’re ill and out of work. Another is the accelerated death benefit, which pre-pays you part of your death benefit based on the length and severity of your illness. A third is critical illness coverage, which pays a lump sum for certain listed illnesses.

What if your plan doesn’t have these riders? “In most cases you can’t add a rider to an existing policy,” says Steve Cagnassola, a financial advisor in Netcong, New Jersey. But he says you may save money by cancelling a current plan and shopping for a new one. New mortality tables adopted by insurers in 2010 reduced the cost of plans, and switching from a pre-2010 policy may be a deal even with the added riders. “Nine times out of 10, if you are in equally good health you can get a policy for less,” he says.

Critical illness coverage can also be bought as a stand-alone policy. Check with your employer or insurance agent to see what’s available.

Another potential source of funds is home equity. You may be able to borrow against the value of your home either through a lump-sum loan or a line of credit, in which you borrow only what you need when you need it.

Find, secure and share your vital information

Assume that you won’t be able to handle your finances (or much else) when you’re ill. Then plan accordingly. Make a list of your bank and investment accounts and how to reach them online; write down URLs, usernames, and passwords. Keep this information up to date, and share it with someone you trust. Make a similar list of critical phone numbers. These should cover not just money matters but everything else people may need to help you when you’re sick—from babysitters and doctors to attorneys and the human resources department at work.

Also, check and (if needed) update the documents that let others act on your behalf if you are not able to do so. You should have a durable power of attorney designating someone to handle your finances. You also need to name someone to make decisions about your health care through another document, the durable power of attorney for health care. This can be drawn up along with a “living will,” which spells out your wishes for the level and type of care you want if you are seriously or terminally ill. Make sure that all the people named to act in your behalf—including those listed as back-ups if the primary parties aren’t available—know what their duties are and are willing to carry them out.

All records and lists should be stored in a safe place. The Financial Planning Association suggests buying a fireproof box that you can keep safely in your home. Make sure that a trusted person has access to the records here and, if you have one, your safe deposit box at the bank.

Know your rights and benefits

Contact your employer’s human resources department to find out about disability benefits. Ask HR if your state has disability insurance that might cover you. Also, find out if you are covered by the federal Family and Medical Leave Act, which entitles workers to up to 12 weeks of unpaid leave per year for a number of reasons, including an illness that keeps you from working. A U.S. Department of Labor website (see “Resources” below) has details on who is qualified and what to expect.

Now is the time, if you haven’t done so already, to take a close look at your health insurance policy. Read it from cover to cover, says Travis Freeman, a certified financial planner and financial educator in St. Louis, Missouri. “There’s really nothing in this country that teaches us about health insurance,” he says, so you have to do your own homework. Knowing the details of your plan will help prevent costly errors—such as overpaying for services or paying for a covered service by mistake. “The only way you would find out about these things is just reading through the contract,” Freeman says.

Update your budget

It’s close to certain that you’ll spend more on medical care. You likely will spend less on activities, such as travel and eating out, that you pursued when you were in good health. You face a loss of some income, though how much depends on your disability plan and whether you have a working partner. Faced with all these changes, you need to update your family budget to make your money last.

If you have been keeping track of your spending by category, look at the past year to see what expenses will remain and which are likely to change. If you don’t have detailed records, try to guess as close as you can with the help of your checkbook and credit card bills.

If you still need cash, your Roth IRA or 401(k) may help

Retirement accounts are not all the same when it comes to withdrawals. In general, it’s best to keep this money in those accounts so that you’ll have it when you retire. But if you need cash now and your other savings are too slim to cover your costs, you may be able to tap into a Roth IRA without a large tax penalty. Unlike a traditional IRA (or a 401(k)), contributions to a Roth IRA come from income that has already been taxed. This part of your account is not subject to taxes and penalties if you withdraw it early—only the investment earnings are. So if you’ve added $20,000 to a Roth IRA and the account is now worth $30,000, two-thirds of your withdrawal is tax-free.

You can also withdraw funds from a traditional IRA without the 10 percent penalty if the money goes to pay health care costs that are more than 10 percent of your adjusted gross income (AGI). For instance, if your AGI is $50,000 and you have $7,000 in unreimbursed medical bills in the same tax year, you can take $2,000 from your IRA to pay those bills.

There’s a similar medical-cost exemption for withdrawals from 401(k)s. But a 401(k) loan gives you more options. You can use the borrowed money as you see fit, and the loan is tax-free even if your bills fall short of the 10 percent threshold. On the down side, you must start paying back the loan right away, and your employer can demand full repayment if you leave your job. But, says Freeman, “if you have to find money somewhere, the home equity loan and the 401(k) loan are the two I would recommend first.”

Resources

To learn more about the Family and Medical Leave Act, go to the U.S. Department of Labor’s website at http://www.dol.gov/whd/fmla/.

For a serious-illness planning checklist from the Financial Planning Association, go to http://www.fpanet.org/LifeCrisis/PreparingforaDisaster/IfYouHadtheTimetoPlanforaSuddenSeriousIllness/

The IRS has details on the rules on early distributions from qualified plans such as 401(k)s at http://www.irs.gov/taxtopics/tc558.html. 

By Tom Gray
Source: Steve Cagnassola, President, Complete Future Planning, Netcong, NJ; Saul M. Simon, CFP®, Simon Financial Group, Edison, NJ; Travis Freeman, CFP®, Four Seasons Financial Education, St. Louis, MO; Financial Planning Association

The information provided on the Achieve Solutions site, including, but not limited to, articles, quizzes, and other general information, is for informational purposes only and should not be treated as medical, health care, psychiatric, psychological or behavioral health care advice. Nothing contained on the Achieve Solutions site is intended to be used for medical diagnosis or treatment or as a substitute for consultation with a qualified health care professional. Please direct questions regarding the operation of the Achieve Solutions site to Web Feedback. If you have concerns about your health, please contact your health care provider.  ©2017 Beacon Health Options, Inc.

 

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