Financial protection from ruinous medical conditions

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(MoneyWatch) Welcome back to my second post on lessons learned from my wife's recent medical crisis. My last post described lifestyle steps you should take to protect yourself from a major health crisis, while this post describes the financial protections you need to put in place. As mentioned in my previous post, you probably already know what these are; hopefully, this post gives will spur you to action.

My first suggestion is that you make sure you have comprehensive medical insurance with unlimited lifetime coverage or high lifetime maximums. Medical premiums for such plans can be expensive, particularly if you don't have employer-subsidized insurance. In our case, my wife and I pay well over $1,000 per month to cover the two of us, but it's been worth it. Between my wife's emergency and my surgery last year, we've incurred medical bills with a retail value (before negotiated discounts) of more than $330,000. The high premiums we've paid have meant the difference between a financial catastrophe and a manageable event.

I acknowledge that, for many people, paying so high a premium would be a hardship. Nevertheless, I encourage everybody to place a high priority on medical insurance over other discretionary items in their budget to the extent that's possible.

High priority means you must not select a policy with low premiums and resulting poor coverage. Last year, Time magazine published a landmark article titled "Bitter Pill: Why Medical Bills Are Killing Us." Many of the horror stories described on this story involved people with either no medical insurance or low-cost insurance with substandard coverage.

If you have access to comprehensive medical insurance through your employer, take the time during open enrollment to learn about your coverage. Many employer-sponsored plans offer a range of options, and you should take the time to study up and see what they are; consider the few hours spent a valuable investment in your health. You would invest at least as much time and care in shopping for a new car or house. But your health is far more important. For most employers, open enrollment takes place in the fall, so make a mental note to learn more about your employer's plan in the months to come.

If you don't have access to an employer-sponsored medical plan, you'll have to buy insurance on your own. You can do your research and shopping through Internet exchanges such as ehealthinsurance.com. Buying insurance on your own won't be cheap, but don't take the bait and opt for the least expensive plan. It may not be the best for you. Make sure the coverage has unlimited lifetime coverage or limits that are very high (over $1 million). Consider only health care providers that have robust networks.

Exclusions for preexisting conditions will prevent many from buying health care insurance on their own this year. Unfortunately, that leaves Medicaid or other public assistance as the only fallback options. That will change come 2014, at which time Obamacare will kick in. In theory, you will then be able to buy a basic health care policy on state-run exchanges, but many states have resisted implementation, and it remains to be seen whether this will in fact be possible. The good news is that some states, such as California, Oregon, and New York, have been actively setting up their exchanges, and it appears they'll be ready next year. Residents in other states may not be so lucky.

My next suggestion is that you maintain an emergency cash cushion to cover deductibles, copayments, and lost wages. For a serious medical condition, this can run to thousands of dollars. My wife and I have learned this lesson twice -- the hard way. In order to create this cash cushion, take a serious look at your discretionary purchases, and find ways to cut back so you can add more to your emergency fund. A health savings account (HSA) is one good savings vehicle for this purpose.

Unlike the lifestyle steps from my previous posts, all of these financial steps will involve some sacrifice from your budget for living expenses. Like it or not, however, they're just part of the price of living in America today.

The lifestyle and financial steps described in my two posts will take time and money to adopt, but they do offer a degree of protection. If you live long enough, life will throw you curveballs, no matter what precautions you've taken. But if you're in good shape physically, emotionally and financially, you'll be better able to deal with life's inevitable surprises.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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