Ways to Keep a Serious Illness
From Wrecking Your Finances
July 15, 2004

The diagnosis of a chronic illness often comes as a one-two punch.

The first lands when the doctor breaks the news about your long-term illness. The second, and more insidious, blow comes later with the realization that a debilitating illness could potentially devastate your family's finances.

Ideally, you have a financial plan in place that provides for you and your family in the event of a health crisis. Too often, however, that isn't the case -- particularly if illness strikes when you're relatively young. If you haven't already, you need to address the potential impact of your condition on your future finances.

"It's a call to order… now is the time to look at your financial situation, do an analysis and update of where things are and where they should be," says Meridee Maynard, a vice president at Northwestern Mutual in Milwaukee.

MANAGING YOUR HEALTH AND FINANCES Has a chronic illness thrown a wrench into your long-term financial plan? Share your experiences with readers on how you dealt with the diagnosis, and revamped your financial plans to accommodate your family's new reality. Write to me at fiscallyfit@wsj.com1.

In this week's Fiscally Fit, I look at how to create a plan to mitigate the financial damage from a long-term illness.

Steps to Take Right Away

In addition to getting your documents in order, such as a will, a health-care proxy (which gives someone you trust the ability to make health-care decisions for you) and a durable power of attorney, there are other areas of your finances that deserve immediate attention.

College costs. Paying for your kids' college educations may have been a part of your long-term financial plan, but it's now something you may not be able to afford.

Luckily, most schools will take a parent's chronic illness into consideration when awarding the student's federal financial-aid package, even if financial aid officials found the student didn't qualify for aid on its initial review, says Mark Kantrowitz, founder of college-financing information Web site FinAid.org².

"What the school has the authority to do is to make an adjustment to the financial aid offer," he says.

A family must first apply for aid using the Free Application for Federal Student Aid. Note that there is no place on the FASFA form to indicate that there is a special circumstance to be considered. Instead, after you've received notification of your financial-aid offer, you can write a letter to the school's financial-aid officer requesting a professional judgment (sometimes called a special-circumstances review) to take into account the financial impact of a parent's long-term illness.

In addition to explaining the nature of the illness and its effect on your family's finances, it's a good idea to provide the financial-aid administrator with additional documents that are verifiable by a neutral third party, such a your doctor or hospital, Mr. Kantrowitz says. See details³ on how the best way to craft a request for a professional judgment.

Debt. Because health-care costs will begin to absorb more of your monthly cash flow, it's important to pay down debt as quickly as possible. That means funneling all available cash toward paying off credit cards and loans, or if you're otherwise debt-free making additional principal payments on your mortgage.

If you're cash strapped, borrowing your way out of your health-care dilemma is the quickest way to leave your spouse with a financial mess in the event of your death. But to pay off existing debt and as health-care costs escalate, some older couples may feel they have no other alternative but to borrow to survive.

While generally I don't advocate reverse mortgages as a way to pay down debt, some older homeowners may find it a good way to help pay health-care bills and finance the retirement of a spouse. With a reverse mortgage, homeowners who are 62 years old or older can borrow against the equity in their property. Instead of a traditional mortgage, where the homeowner makes payments to a bank, with a reverse mortgage the bank pays the homeowner. The loan is repaid, with interest, when the borrowers sell the house, move or die.

Of the 27.5 million households currently aged 62 or older, 13.2 million would be good candidates for a reverse mortgage to pay for long-term care, says Barbara Stucki, a consultant in Bend, Ore., who is heading a study on reverse mortgages for the National Council on the Aging in Washington, D.C. The average amount per household they would be eligible for after costs with a reverse mortgage is about $72,000.

"If you were spending about $500 a month on health-related costs, that money would last almost 14 years under current interest rates," she says. To learn more about using reverse mortgages to finance long-term care, read this article⁴.

Investments. Depending on the illness and how old you are when it's diagnosed, you should rethink the types of investments in your portfolio, says Ms. Maynard.

Your time horizon in the work force may be five years instead of 15, she says, so "now is a good time to see if there are certain investments that need to be converted to more liquid assets and to switch to a balanced portfolio that leans toward a more conservative asset allocation."

For example, if you're in your 40s or 50s, chances are your employer-sponsored 401(k) account or individual retirement account are concentrated with stocks or growth-oriented mutual funds. With the likelihood that you'll need to tap those funds sooner than you anticipated, a more prudent allocation may be to shift more of your assets to balanced funds or bonds.

But Chris Cooper, president of ElderCare Advocates, a long-term-care consulting firm in Toledo, Ohio, cautions against making drastic changes to your portfolio until you better understand how the illness will affect your ability to continue working.

"A diagnosis of a chronic illness may or may not mean that Dad can't continue to do what he had planned to do with his life," he says. "With medication and lifestyle modifications, he may be able to continue doing his job until the time he had planned to retire anyway."

Mr. Cooper suggests consulting your doctor as well as a geriatric-care manager, who specializes in elder care and can offer insight on what you might expect as the illness progresses. You can start with the National Association of Geriatric Care Managers⁵ in Tucson, Ariz.

Once you have a better idea of what your portfolio's time horizon should be, it's a good idea to make an appointment with a financial planner to help you map out a new investment strategy. Don't have a planner? This article⁶ can help you find one.

Taxes. Medical costs are likely to eat up a greater chunk of your income as your illness progresses, so now is the time to get serious about keeping track of tax-deductible medical expenses and co-pays. To get a rundown on what expenses may qualify for a tax break, see the IRS Web page covering medical and dental expenses⁷.

Also, check with your employer to find out if it offers a flexible-spending account, which allows you to save for medical expenses with pretax dollars. Depending on the illness and the cost estimates you receive from your doctor or geriatric-care manager, you may want to start saving the maximum amount allowed.

Consult a certified public account or tax attorney to make sure your assets are properly titled and to set up trusts for your children, if that is your wish, says financial planner, says Evan R. Bell, a financial planner at Bell and Co. in New York.

"In terms of separating assets, setting up a trust and making sure all of your assets are titled properly may help your spouse and children avoid estate taxes," he says.

Insurance. With adequate health-care insurance, life and disability insurance in place, the damage to your family's finances should be minimal. All too often, however, an individual will realize that the insurance they have provides inadequate coverage at best, or none at worst.

"If you don't have disability insurance right now you're not going to get it, and depending on your circumstances, with life insurance -- if you can get it -- it may not be worth the cost," Instead, he says, take the time to find out you're is and isn't covered in your current insurance policies, to be sure that the coverage provides for the illness you have.

If an illness prevents you from obtaining insurance, you should still be sure to get adequate coverage now -- for your spouse.

"If you have young children it's even more important that the spouse get coverage," says Northwestern's Ms. Maynard.

Compare policy options and prices at insurance Web sites such as Insure.com⁸, InsWeb.com⁹ and Accuquote.com¹⁰.

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Write to me at fiscallyfit@wsj.com¹¹.