Avoiding Financial Disaster Due To Medical Disability

This week, we’re highlighting an example of being prepared financially for the unexpected to help understand why it’s so important.  Rather the recreate the wheel, I thought that the first-hand experience of a CNBC/Nightly Business Report’s Sharon Epperson is worth sharing.

The five steps Sharon and her husband took to avoid a financial disaster when she suffered a brain aneurysm in 2016 are summarized below.  A link to the CNBC page featuring the three minute segment (video) that aired on Nightly Business Business report a week ago, which we recommend, can be found by clicking here.

Enroll in a comprehensive health insurance plan

Get employer-based medical insurance if your job offers it. If you are a freelancer, contractor or self-employed, you can get health coverage through the individual health insurance marketplace. Also, make sure to contact an independent health insurance agent to explore your options.

If you don’t have a comprehensive health plan that covers basically everything, you can have complications after a medical emergency that can put you into bankruptcy.

Set aside ample emergency savings

Many financial advisors suggest you have a “rainy day” fund to cover at least three to six months’ worth of living expenses. Yet a medical emergency can feel more like a hurricane.

Having a larger stash of cash can save the day if there are mounting health care expenses.  Still, building that emergency fund takes time, so start small.

Living within your means is essential, and you may find you have to cut some discretionary spending in order to save.  Try putting aside 5 percent to 10 percent of your pay each month into a money market or savings account.  Set a goal of saving enough money to cover at least one month of living expenses, then gradually work your way up.

As we’ve highlighted in the past, funding a Health Savings Account (HSA) to cover medical expenses in retirement is also a recommended strategy.

Get disability insurance

While you are working, your earning capability is even more important than the earning capability of your investment portfolio.  So you should “insure your earnings” if you can.

As compared to life insurance, which many of us routinely have, disability insurance covers a more important risk.  The probability of becoming disabled is significantly higher than dying.  Disability insurance payments will provide steady income when your pay check stops, or if you are too ill or injured to work.

Group disability policies offered by employers typically cover 40 percent to 60 percent of your salary, while some companies offer supplemental disability coverage that is usually much cheaper than if you bought it on your own.

While companies often pay for the disability policy, employees may have the option to pay premiums themselves through payroll deduction.  If you do that, the benefit will be tax-free when you use it.

However, self-employed people who do not have disability insurance say private policies are too expensive.  What you do for a living matters so it makes sense to talk to your advisor or an independent insurance agent to find ways to make it more affordable.  One option is to consider extending the “elimination period” of the disability policy before the policy kicks in to bring down the cost of premiums.

Figure out who will make key financial and health-care decisions

An estate plan with prepared legal documents that identify who will do what will make critical decision-making a lot easier.  Here are two documents that all adults should have and for which these key roles will need to be filled:

• A health care power of attorney to step in and make decisions ranging from emergency to ongoing medical care when you can’t make them for yourself;
• A durable power of attorney to make financial decisions, including making sure bills are paid, and
• A guardian to care for minor children and help them manage day-to-day activities.

If you haven’t done your estate plan yet, at least have the conversation with your loved ones about whom you would want to take over these important duties, if you are no longer able to do so.

Put your finances on autopilot, and clue in your designated power of attorney

• Sign up for direct deposit at work. This way while you are on sick leave and/or disability, your paychecks, as well as disability payments that are made through the payroll department, will automatically go into your bank account.
• Use automatic bill pay for essential household expenses, such as rent or mortgage payments, utilities and phone.
• Set up online or mobile banking, and keep your password in a safe place.

However, don’t keep all of this information to yourself. “Periodically share the ‘big picture’ of your finances with the person who would take over in the event of an emergency.  Keep an updated spreadsheet with details of assets, liabilities and bills to be paid.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.