Why Illness Protection Should Be Part of Your Financial Plan
December 6, 2021
When you’re younger, the prospect of becoming seriously ill is probably the farthest thing from your mind. It’s far from a “fun” thing to consider, but including the prospect in your financial plan can be important. After all, health care in general can be expensive, but especially so for those with a serious illness. In fact, a recent survey of Americans with a serious illness revealed that despite 9 in 10 of them having health insurance, more than half experienced dire financial consequences related to their care, including exhausting their savings or needing to take out a loan or another mortgage to make ends meet.
While the prospect of a serious illness is not pleasant to contemplate, you can take steps today to financially prepare in case that day ever comes. Here’s how.
Bolster your savings.
The first rule of thumb is to build your emergency savings so you have resources to fall back on if you get sick. A diversified, accessible, and healthy amount of savings can help you weather a variety of unexpected events such as an emergency home repair, a sudden job loss, or a serious illness. But what if that illness lasts a long time and requires a lot of care? Because most people’s savings cannot withstand such costs, you may want to consider additional options.
A policy for critical illness.
There are forms of insurance that supplement your health insurance and provide benefits if you are diagnosed with certain diseases. Such insurances include critical illness insurance and cancer insurance. These are separate policies that you purchase apart from your regular health insurance (in most cases from a licensed insurance agent). They are an addition to your regular health insurance policy, not a replacement for it. Terms and conditions will vary by insurer, so be sure to understand the illnesses that are covered by any policy you are considering. Many policies pay out in one lump sum, although you may be able to structure the payout in a series of payments.
Disability Insurance (DI)
Depending on the policy, disability insurance (DI) replaces all, or (more commonly) a portion, of your take-home pay if you are not able to work for an extended period due to an illness or injury. During their working years, many people rely on DI to provide income replacement after a serious diagnosis. This can help a family weather financial strain during treatment and recovery.
There are generally two ways to get DI—through your employer or by purchasing an individual DI policy. There are also two types of DI: short-term (typically 3 to 6 months) and long-term (typically more than 6 months).
How life insurance can help.
You probably know that life insurance pays a benefit to your loved ones if you die. What you may not realize is that some policies can be purchased with additional benefits for you in the event of a serious illness. In fact, there are two ways that life insurance may be able to help you if you become seriously ill: first, by providing access to your account value and, second, by paying you part of the policy’s death benefit while you are living. Let’s take a closer look at both of these options.
Permanent life insurance policies, whether universal life or whole life, offer a component called the account value or cash value. Your account value grows tax-deferred over the years, and once it has sufficient value you can access it at any time. This feature can come in handy if you should become ill and need the money to cover extra medical bills, rides to appointments, or the cost of in-home help. There are no limits on how you can use that money.
Another feature often offered with permanent life insurance policies and term policies (i.e., those that are in effect for a set period of time before expiring) is access to Accelerated Death Benefit (ADB) riders. These benefits pay part or all of the death benefit to you while you are living if you develop a serious illness. In order to receive the benefits, you must meet the policy’s qualifications and provide proof that you’ve been diagnosed with a serious illness. It’s important to understand that any payout you receive through these riders diminishes the amount left in the policy for your beneficiaries when you die, and interest withdrawn will be taxable. Depending on the policy, some of these riders may already be included in your policy or can be added to your policy at the time you purchase it for an additional cost. Be sure to check on the availability of these riders when you buy your policy, as you may or may not be able to add them later on.
What about Long-Term Care (LTC) insurance?
Long-term care (LTC) insurance is designed to help pay for costs associated with long-term care needs that are not covered by health insurance. Generally, for a LTC policy to begin providing benefits, the insurance company requires you to need help with at least two “activities of daily living.” These are: eating, bathing, dressing, maintaining continence, using the toilet, or mobility (e.g. being able to move from bed to chair). Many policies pay for care received in a nursing home, assisted living facility, or adult daycare center, or for in-home care for a specified period of time.
LTC insurance is an expensive product, and its primary users are people older than 70, with nearly 70% of claims filed after age 81, according to the American Association for Long-Term Care Insurance. Given that, and the fact that premiums will rise as you get older, the best time to buy LTC insurance is an individual choice. Some experts recommend that those in good health wait to buy it until their 60s, when it’s closer to the time you’ll need it. Today, there are products that combine life insurance with LTC insurance. Often referred to as hybrid policies, they essentially provide a life insurance policy with a LTC rider. Functioning similarly to a policy with an ADB rider, described above, a hybrid policy will pay a portion of the policy’s death benefit to you to help you meet the costs of living with a long-term illness.
Take stock and weigh your options.
Serious illness is something many people fear, and for good reason—statistics show that the possibility is not as remote as most of us would hope, even for those who do what they can to live a healthy lifestyle. That said, it is reassuring to know that by being proactive and taking certain preventive steps now, you can minimize the negative financial effects on you or your loved ones should you fall ill in the future. Be sure to investigate all your options to find what makes the most sense for you.
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