Why Planning Ahead Is Important

Coping with serious illness with money is very different from trying to cope with serious illness without money.

To have financial well-being while having a serious illness like AIDS or multiple sclerosis requires lead times for dealing with such things as taxes, investments, estate plans and insurance.

Particularly with insurance, advance planning can mean the difference between good care and insufficient care, between security and disaster. Insurance requires advance planning for a number of reasons, but chief among them is the need to deal with various kinds of clauses which have a time period component. Under some, one has to wait for time to pass in order to get a benefit; under others one must take a positive step within a specified period of time or "window."

Some examples of these clauses are elimination periods (refer to The Bulletin's easy-to-understand glossary of the personal finance terms used in this article), pre-existing condition exclusion periods, conversion periods, incontestable periods, qualification periods, freeze periods and limitation periods. The following discussion will shed light on these important components of your insurance:

Your disability income insurance may contain a six-month elimination period requiring you to be disabled for this period of time before your monthly checks start. Similarly, Federal Social Security disability benefits have an elimination period of 5 full calendar months. You need to plan how you are going to cover all your living expenses during that period.

Most medical insurance policies contain a preexisting condition exclusion clause. If you have a serious illness like diabetes when you became covered by a medical insurance policy, the pre-existing condition exclusion says that medical expenses incurred for that preexisting condition will not be reimbursed for a certain number of months (for example, 12 months). After you have been covered by such a medical policy for those 12 months, your otherwise qualified diabetes-related medical bills will begin to be reimbursed. On the other hand, if one month after becoming covered, you break your arm, your orthopedic medical expenses will be covered; the broken arm was not a pre-existing condition at the time the insurance coverage started. Group disability insurance also has a pre-existing condition exclusion clause.

Even though a serious illness such as a kidney failure or heart transplant may make you virtually uninsurable as far as private individual and small group life insurance is concerned, you still have the ability to buy guaranteed issue life insurance. A usual feature of guaranteed issue life insurance is that, if death occurs in the first two or three year limitation period, the face amount is not paid as a death benefit, only the premiums plus perhaps some modest interest are paid out.

Employer-provided group life insurance almost always allows one to convert to an individual policy when one leaves employment group. There is a requirement that within a specified conversion period, usually 31 days, one must initiate a notification that one wishes to convert the coverage. At the time of employment termination, the employer may not provide notice that this conversion privilege is a feature to which you are entitled. If you do nothing, your right to the converted life insurance policy expires and you simply lose a valuable asset. If you are healthy (and insurable) when you leave the job, this loss could be replaced easily. However, if you become disabled with a serious illness and could no longer get another job with life insurance benefits nor buy private life insurance, the loss is extremely significant.

How significant?

A recent development makes life insurance a very significant source of possible income for people with terminal illness. People with life expectancies of less than 24 months can now sell their life insurance policies and receive a "viatical settlement" of 60% or more of the face value. And some insurance companies have instituted "accelerated benefit" programs to pay early death benefits of up to 90% for people with very short life expectancies (less than 12 months). While these living benefit options may take care of you financially at the end of your life, you still have to plan ahead and make important insurance choices when you are not yet eligible for the option.

While the previously-mentioned guaranteed issue life insurance may be expensive for what you get, the advent of viatical settlements and accelerated benefits may now make purchasing this high-cost insurance a wise strategy if you buy it several years before you might want to convert your policy to cash.

Other areas of your personal finances besides insurance have time window considerations which call for planning ahead. Here are some more examples:

Your financial strategy may call for a declaration of bankruptcy. However, filing for bankruptcy is not something that should be done at the point when the debts have just become overwhelming. You should plan ahead for it. One reason for doing so is that transactions during the freeze period, usually 90-120 days preceding the filing, can be reversed by a bankruptcy court. In addition, many states have a rule which says that the proceeds of life insurance received within, for example, six months after discharge from bankruptcy are available for claims of creditors. The proceeds of life insurance rule was included in the bankruptcy law to mean receiving the benefits from someone else's life insurance, but the wording also includes living benefits as well. Much of what can be accomplished by declaring bankruptcy can be undone by getting cash from your life insurance policy too soon after bankruptcy.

In the realm of planning ahead to reduce income taxes, a very important consideration is whether your disability benefits are taxable or not. If an employer pays the disability insurance premiums, the benefits are taxable income to the disabled person. If you pay the premium out of your own after-tax dollars, the disability benefits are income tax free and that makes a big difference on how much you have to live on. Some employers will permit you to reimburse them for the employer-paid group disability insurance premiums, but you have to pay while you are working and not after you are disabled.

A sometimes useful tax planning technique is shifting taxable income into lower tax brackets. For example, assume we know that you are going to be disabled we know that you are going to be disabled and you will have tax-free disability benefits and no taxable income (because you planned ahead). Contributions can be made to a retirement plan (IRA, Keogh plan, 401k) in the last year worked and the contribution is deducted from that same year's taxable income. Then the money is withdrawn from the retirement plan in the first full year of disability when you have no taxable income. The result of this maneuver is that you save all the income taxes on the amount that went into and back out of the retirement plan. Just keep in mind however, that your timing is important to make this strategy work.

A useful planning tool to reduce estate taxes is the transfer of life insurance policies into an irrevocable life insurance trust. If death occurs more than three years after the transfer of the life insurance policies to the trust, the death benefits fall into the "exclusion period" and are excluded from the taxable estate. If death occurs outside of the exclusion period -- less than three years after the transfer -- the death benefits may be subjected to very high estate tax rates (federal estate tax rates are 37-55%).

Suggestions

The important point to remember is that the world of personal finances and insurance is one that must be skillfully navigated in order to pass through numerous time-sensitive "windows." There are an especially large number of windows relating to job departures, whether the reason is a layoff, a freely-chosen career transition or because your illness requires it. Consulting a personal financial planner and/or reading various publications on personal finances by Affording Care can help you avoid losing both money and insurance coverage when you need it the most. The key is to plan ahead and the time for that is now.

David Petersen was a lecturer, author and retired comprehensive personal financial planner. Prior to retirement, he was Vice-President of Peregrine Planners, which specialized in financial planning for the terminally ill. Mr. Peterson was founder and the President of Affording Care. In May of 1996 he died from complications from AIDS.

Also by David Petersen: How to Get Free Medications