Money milestones: Financially preparing for a life-altering medical diagnosis

Hearing you or a loved one has a life changing medical condition is world-changing, including your financial picture.

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Brian ActonContributing WriterBrian Acton is a contributing writer at Policygenius, where he covers insurance and finance. His work has also appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, and HuffPost. 

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As a certified financial planner and founder of True Worth Financial Planning, Rachel Burns had taken steps to protect her family’s finances just as she advised her clients to do: She made an estate plan and got health and life insurance for her and her husband. 

Burns helps newly single women in their 30s and 40s with their finances after the death of a partner or divorce. So she was ready when her family experienced a crisis of its own.

“I have extensive professional experience dealing with clients who have received a life-changing diagnosis, but I've also experienced it myself,” Burns says. “My husband was diagnosed with a rare and aggressive brain cancer four years ago.” She was pregnant with twins at the time. 

A life-changing medical condition can upend your financial picture. Health care is expensive, especially when it comes to emergency procedures or ongoing care. For example, a cancer diagnosis can cost thousands of dollars, with expenses fluctuating based on insurance, the type of cancer, prescribed drugs, and more. 

For Burns, having insurance and protecting her family’s assets made it easier to manage the sudden spike in medical bills. Here’s how to prepare your finances for a life-altering medical diagnosis. 

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1. Get insurance coverage

One of the most important things you can do to protect your finances is to make sure you have adequate insurance. 

Health insurance

Getting health insurance should be your first priority. Without health insurance, you will be responsible for the full cost of medical treatment for your diagnosis. These are the kinds of costs that could bankrupt someone, wreck their credit, or leave them in debt for the rest of their lives. 

Health insurance policies won’t always cover 100% of your medical expenses. You will typically need to pay a portion of your bill, including co-pays (flat fees that you pay for specific services) and deductibles (the amount of money that you have to pay for services before your insurance kicks in to cover the rest). If you hit your out-of-pocket maximum, which is the maximum amount you have to pay in a calendar year, the insurer will cover all of your costs for the rest of the year. 

The amount you’ll pay for coverage will depend when you get covered and what plan you can get.

  • Employer-sponsored health insurance is provided by employers to their employees. Employers often chip in to lower premiums and deductibles, making this an affordable way to get covered. You may be able to choose between multiple plan options with varying costs. 

  • Medicaid is a federal and state insurance program that provides free or low-cost coverage to people based on income and family size. You can apply for Medicaid through your state.

  • Marketplace plans are available to purchase privately through the market or state exchanges. If you are self-employed or you don’t receive coverage from an employer, you can get insurance this way. 

  • Medicare is health insurance provided to all Americans over the age of 65 and younger people with specific illnesses or disabilities. 

You can enroll in a health insurance plan or make changes to your plan during the open enrollment period. You can enroll outside of the open enrollment period if you experience a qualifying event such as leaving your current employer, getting married or divorced, having a child and more. 

Receiving a serious medical diagnosis is not a qualifying event, so you need to have health insurance before that happens. It's important to get your health insurance plan right the first time. 

"After having some bad experiences with our Health Maintenance Organization, we decided to switch plans so we would be able to go out of network for specialists,” Burns says. “It was nerve-wracking to make major changes to our health care coverage in the middle of my husband's treatment. but we had so much more flexibility to meet with specialists and get second opinions." 

Life insurance 

Life insurance will help financially protect your family when you die. The amount of coverage you need depends on your assets, debts, number of dependents, cost of your children’s education, and more. Getting coverage while you’re healthy can ensure you qualify for a policy and help you save money. Serious health conditions can lead to higher premiums and you may not qualify at all if you’re seriously ill, Burns says. 

Getting denied for coverage would mean you’d have to turn to a much more expensive option like guaranteed issue life insurance. This is a type of life insurance that doesn’t require a medical exam or questionnaire, but has a smaller death benefit compared to other insurance types.

Check if your employer offers a life insurance policy. They probably only pay a portion of what you need, but it’s a good place to start. Beyond that, you’ll want to buy your own policy or adjust your existing policy to ensure you have adequate coverage.

  • Term life insurance requires you to pay premiums on a schedule, for a predetermined period of time (usually 10 to 30 years). If you die during this time period, your beneficiaries will receive the death benefit. “A term policy is usually pretty inexpensive, and if it's not available through your employer, you can easily get your own individual policy,” Burns says.

  • Whole life insurance does not have an expiration date, and lasts your entire life. Every month, part of your premium goes into the cash value, which is similar to an investment vehicle in that it grows over time. The cash value can be used to take out loans, pay your premiums or be withdrawn for retirement. Whole life policies can be less attractive to most people because they are five to 15 times as expensive as term life policies

Disability insurance

Disability insurance can help protect your paycheck if you can’t work because of an illness or injury. Once you purchase coverage, through an employer or on your own, it covers you regardless of where you work and only kicks in if you need it. There are two types of disability insurance:

  • Short-term disability insurance will pay out a portion of your paycheck for a short period of time, usually around three to six months. Most of the time, people receive short-term disability from their employer. It’s possible to buy a policy on your own, but these plans can be costly.

  • Long-term disability insurance provides coverage if you’re out of work for a longer period of time, even for decades, and will kick in once your short-term disability benefits run out. Employers will sometimes offer long-term disability but it’s less common. You can take out individual long-term disability on your own, at a cost of around 1-3% of your income.  

Having a disability insurance policy maintained a stream of income for the Burns family. “Make sure your policy covers enough of your salary to cover your basic expenses in the event you're unable to work,” Burns says. “Disability coverage kicked in after [my husband’s] surgery, and the impact to our cash flow was minimal.”

Long-term care insurance

Three out of four seniors will end up needing some type of long-term care, but Medicare will not cover these costs. Long-term care insurance covers certain costs of managing chronic illnesses and other health conditions in your old age. It kicks in when seniors need care that isn’t covered by health insurance like nursing homes or at-home services like home health care, respite care, and more. 

Elder care services can be prohibitively expensive — for example, nursing homes cost $75,000 to $150,000 per year. While you can plan for some expenses in your old age by saving and investing for retirement, it might not be enough.  

That’s where long-term care insurance can help. It’s worth a look if you have savings and you don’t want to deplete your finances on elder care. The earlier you get a policy, the better — the costs of long-term care insurance increase as you get older. If you plan on getting long-term care insurance, try to buy a policy before you’re 60 as it may become unaffordable after that.  

2. Save for emergencies

Any financial preparation plan should include setting aside money for emergencies, including large medical bills. Over half of all debts that get sent to collections are medical bills, and over 38 million Americans owe $10,000 or more.  

There are several ways you can put aside funds to help cover the cost of medical services. 

Emergency savings funds 

An emergency savings fund can help you afford costly medical bills without decimating your income. It’s commonly recommended to have three to six months’ worth of expenses saved up, but you may want to save more if you can. If that sounds like too much, remember that having something saved is better than having nothing at all. 

Traditional savings accounts are easy to use, but they won’t grow fast enough even to keep up with inflation. High-yield savings accounts can earn more, but their interest rates aren’t as strong as they used to be. You could consider a money market fund, a pool of lower risk investments, to park your money.

Wherever you keep your emergency fund, you’ll need easy access to it when medical bills come due. You’ll want to avoid anything that takes a lot of time to withdraw, or that has withdrawal penalties associated with it. Consider speaking with a financial advisor to determine the right savings account for your needs

Flexible spending accounts

Flexible spending accounts are tax-advantaged savings accounts offered by some employers. FSAs allow employees to set aside pre-tax funds directly from their paycheck for medical expenses, services, supplies, and prescription medications. You have to decide how much to contribute at the beginning of the plan year (the annual contribution limit for 2021 is $2,750). But you will lose anything that is left in your account at the end of the plan year

For now, it’s a good idea to contribute enough to an FSA to use for routine medical expenses and have those funds available in your account if you receive a more serious medical diagnosis. If that happens, you may want to increase your contribution amount the following plan year to get the maximum tax benefit you can. 

Health savings accounts

Health savings accounts are only available to people who have a high deductible health plan, which in 2021 is defined as a health plan with a minimum deductible of $1,400 for individuals or $2,800 for families. 

Depending on if you opened an HSA on your own or not, you will contribute funds pre-tax from your paycheck or after tax on your own (if the latter, you can deduct after-tax contributions on your tax returns). 

Funds can be invested in stocks, bonds, and mutual funds. Contributions and earnings are tax-free when used for eligible medical expenses, just like FSAs. Unlike FSAs, you can carry over funds from year to year and even if you switch jobs. 

3. Create an estate plan

Estate plans can help define who gets what when you die. They also help make financial and medical decisions for you if you are unable to do so. Your estate can also be used to pay for funeral expenses (or reimburse family members for out-of-pocket costs), which can lessen the burden on your family. 

You’ll want to create an estate plan with an online estate planning tool or attorney. To start, you’ll need to take an inventory of all your assets including bank accounts, investments, retirement plans, real estate or property, businesses and more.  

The steps you’ll need to take to make your estate plan official will depend on the type of plan and where you live. At minimum, you’ll need to sign your will and file it with the county you live in. You may want to update your plan as things change, life getting married or divorced, buying or selling property, having children, and more. 

The following aspects of estate planning are especially important to have in place if you ever develop a serious medical condition. To put together a comprehensive estate plan, you’ll need to take these steps:.  

Establishing power of attorney

It’s a good idea to establish power of attorney so someone you trust makes medical and financial decisions on your behalf. You can choose one person or multiple, Burns says. 

If you don’t set up power of attorney before a medical condition leaves you incapacitated, someone could make financial or medical decisions that you wouldn’t agree with. That could complicate matters as simple as paying your bills and as complex as whether to leave you on life support.  

  • Financial power of attorney authorizes an agent to make financial decisions and transactions for you. This could include buying or selling property, accessing the money in your bank account or retirement accounts, filing your tax returns and more. 

  • Medical power of attorney authorizes an agent to make medical decisions for you, including matters like long-term care and end-of-life options. You may even want to use one if you’re undergoing a one-time surgery or medical procedure. You should give your primary care doctor a copy of your medical power of attorney.

Both medical and financial powers can be set up as a durable power of attorney, which essentially means the agent has the power to carry out their duties if you are mentally or physically incapacitated. 

“We met with an estate planning attorney days before my husband was scheduled for brain surgery. He had not been diagnosed with cancer at that point, and we had assumed it was a recurrence of a benign tumor,” Burns says. They were able to set up a living trust, wills, powers of attorney, and guardianship documents. Burns says they didn't need to make any adjustments to their plan after he was officially diagnosed because of their advanced planning. 

Creating a will

When it comes to administering your estate after your death, at the very least you need a will. A will names the executor of your estate, who will handle financial matters and ensure your assets are properly distributed. 

A will also defines how you want your assets, including all your money and property, to be distributed when you die. You can also nominate legal guardians who will care for your minor children. Without a will, probate courts will determine how your assets will be divided up. This process can become time consuming and expensive for your beneficiaries. 

Consider setting up a living will, also known as an advance directive. These documents contain decisions about your medical care that you’ve predetermined ahead of time, in case you can’t make decisions on your own. 

Living wills can help you dictate whether you should receive CPR or resuscitation if your heart stops beating. You can determine how long you wish to be kept alive on a feeding tube or respirator. You can state whether you wish to receive end-of-life care at home or in the hospital, and if you’d like to donate your organs after you die. You can even decide what types of pain meds you do or do not want. 

Creating a trust

You can create a trust in conjunction with your will, which is a more detailed way to control how your assets are distributed after you die. Trusts can include directions for how and when beneficiaries receive assets, and in most cases don’t have to go through probate like a will. 

With a trust you can stipulate that your children can’t access the money you set aside in a trust until they’re a certain age. You can also keep funds, like life insurance death benefits, in a trust fund to pay for your child’s education or a mortgage. Unlike wills, trusts are private documents. 

You can create a trust without a will, but you’d probably benefit more from having both. That’s because there are certain things trusts don’t do, like name guardians for your minor children. 

Policygenius now has attorney-approved tools to help you create a will or trust that is fully legal in your state. 

Planning for a serious medical condition or death isn’t fun, but it is essential. With a little bit of preparation, you can better protect your money from the high costs of medical care, protect your loved ones financially and make decisions surrounding your medical care and finances now so there are fewer messy complications later. 

Recommended reading

Here’s how a health savings account works

Generally you need about 10 to 15 times your income in life insurance coverage, but the number can vary. We can help you calculate your needs here

There’s a lot more to estate planning than just saying who gets what. Here’s our complete 2021 guide to estate planning

Here’s a deeper dive on power of attorney

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