Illness And Family Finances

Money stresses can be at their worst when a family member is stricken with a serious or terminal illness. Hospitalization and loss of income can devastate a family's finances. For those in this very difficult and painful situation, CBS This Morning and financial planner Gary Schatsky have some options to consider.

Health insurance, for those who have it, may cover most medical expenses. But there are many other expenses that a family with a member who is seriously or terminally ill needs to think about. On top of the illness and emotional turmoil, the cost of maintaining a family doesn't go away. In addition to covering the cost of medical bills that are not covered by insurance, there are regular bills like the mortgage to pay.

The important thing to know is that there are financial options available for families in this plight. "The first thing to do is to take a deep breath and not act quickly," says Gary Schatsky, a personal financial planner and attorney in New York City. "Make sure you are making the right decisions for you and your family. Know what your financial options are, and carefully and as calmly as possible make decisions."

For starters, Schatsky advises families to take a look at their assets and liabilities. Consider debts and borrowing opportunities. Consider which assets might be liquidated and if there will be penalties, like tax penalties, commissions or sales charges.

If you find you need to sell assets, Schatsky recommends considering first those that don't have a tax penalty cost and that are not earning a very high rate of return. These might include cash, bonds, money market funds, and certificates of deposit.

Then, consider selling any investments that have been performing well. According to Schatsky, "You might want to trim back stock market exposure. You are not looking long term, you want to raise cash."

Carefully research your tax liability when looking at your retirement accounts. If you cash them in before retirement age, notes Schatsky, "there may be a giant tax liability. In some cases you can borrow against a 401(k). The only good news about liquidating a retirement account is if you are under 59 1/2 and disabled, there will be a tax due but not an additional penalty."

Next, look at other borrowing opportunities, such as a home equity line of credit. Schatsky says, "If you previously set up a home equity line of credit, you may want to consider drawing on that. Normally it's tax deductible with a reasonable interest rate of seven to nine percent and repayment can be interest only for a period of years."

Then consider borrowing from other family members. "Before you go about accumulating 10 to 20 percent interest rates, if there is ever a time to consider borrowing from the family, it is now," he says. "They may want you to do it rather than make other financial moves that arnot wise for the family in the long-term."

There are more complicated borrowing opportunities to think about, like a reverse mortgage in which a homeowner borrows against the equity in the home. The downside is that the interest rates can be very high and can take months to put in place.

If all else fails, Schatsky has a category of "last choices" to consider: using credit cards, taking a viatical settlement, and borrowing against a life insurance policy.

Credit cards, of course, can have extraordinarily high interest rates, as high as 20 percent or more. And, you have to begin paying the money back right away.

In a viatical settlement, a person essentially sells his or her life insurance policy to another person. The buyer has evaluated the seller's medical history, concluded that the seller has only a limited time to live, and therefore the policy will pay off soon. Historically, these are not good moves for the seller. Those who buy up life insurance policies are in the business to make money.

For example, if you have a $100,000 insurance policy and a two-year life expectancy, you may get only $60,000 out of the sale of that policy. If you die sooner than expected, it's a windfall--for them, not for your family. If you have no other choices, a viatical settlement is an option, but remember your beneficiaries no longer benefit because the policy has been sold.

There is a new type of product that allows the insured individual to get a line of credit against the value of their insurance policy. According to Schatsky, the only product that he knows of that does this is called The LifeWise Secured No Payment Loan Program. The insured person can get a line of credit on up to 85 percent of the face value of the insurance policy, provided the borrower's life expectancy is five years or less. Even though this falls into Schatsky's last resort category, it is, he says, "a welcome addition to options for people with difficult financial situations and health conditions." The upside is that families have another opportunity to access money. The downside is that it is a loan with a high interest expense. According to Schatsky, the overall interest on using the line of credit offered by LifeWise could be as high as 20 percent when you add in fees.

One other thing to check: some insurance policies have an allowance for "accelerated benefits or living benefits." This is similar to selling your policy to a third party.

Making such financial decisions can be complicated for anyone, but even more difficult for people who are ill or are caring for an ill family member. Schatsky recommends consulting a financial advisor or attorney. And, make sure you go to someone who is not motivated to sell a particular product. An independent adviser will charge a fee for advice, but will not receive a commission for recommending a product.

For more information, contact the National Association of Personal Financial Advisors.

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