insurance

Financial planning for a chronic illness

Stethoscope laying on money
Highlights
  • The best time to buy health insurance is before you become sick.
  • A disability policy won't pay for illness, but will replace income.
  • Consider a hybrid product that combines long-term care with an annuity.

When David Johnson (not his real name) was 43 years old, he began feeling sick a lot. After many doctor visits and an increasingly difficult time keeping up with his work as a freelance writer, he was eventually diagnosed with chronic fatigue syndrome. At the age of 46, Johnson finally admitted he didn't have the strength to go on working, and he applied for benefits under his disability insurance plan. Now 63, he has been living with his condition for nearly 20 years.

"The thought of chronic illness never occurred to me," says Johnson. "I imagined either I'd get a fatal disease, or I'd get better. I had no conception of spending the rest of my adult life on disability." However, he says, "buying disability insurance was the best thing I ever did."

Although it's difficult for most of us to imagine this happening to us, having a plan in place to limit the financial consequences of illness can save a lot of grief. Bruce Elfenbein, a financial adviser and retirement specialist with Seeman Holtz in Boca Raton, Fla., says, "There's nothing that will suck your retirement savings away faster than a chronic illness." What to do?

Emergency fund

"First and foremost," says Joshua Schefers, a CFP and licensed insurance agent from California, "it's extremely important to have an emergency fund. If you're struck with something unexpected, like a significant illness, you're going to have new expenses. You'll probably be working less, too, so you need savings to get you through the downtime." He recommends having at least three to six months' worth of living expenses in a liquid account. If that's not feasible, he says, the next best thing is to establish a line of credit and keep your credit rating as solid as possible so you're in a position to borrow some cash if you have sudden needs.

Health insurance

If you're not one of the lucky ones with an employer-provided health insurance plan, make sure you take care of this need somehow. The time to buy good health insurance is before you get sick; it can be extremely difficult to get a plan after you need it.

Disability insurance

A disability policy is income-replacement insurance. In other words, it does not help to pay for any kind of medical care, nursing home services or any particular expenses. Rather, disability insurance typically provides people with about 55 percent to 60 percent of their normal income when they cannot work because of an extended illness or injury.

Elfenbein does not generally advise his clients to purchase this because they tend to be retired. If you're not earning an income at the time you get sick, you will not benefit from disability insurance. For most people, though, this can be a vital form of protection.

Five states (California, Hawaii, New Jersey, New York and Rhode Island) have some kind of state-managed or mandated disability insurance program. Even if you live in one of those places, though, it's unlikely the state plan will be enough if you come down with a chronic condition. State disability is usually a short-term plan only (six months to a year), and you don't participate in it if you are a contractor, small-business owner or unemployed. It's only for people in regular, salary or wage-paying jobs. Some employers offer long-term disability plans; if yours does, make sure you participate in it.

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