Planning for Catastrophic Illness

If you are faced with a catastrophic illness like breast cancer, in addition to dealing with health and emotional problems, you will likely be faced with enormous medical bills. If you are not prepared, a serious medical condition can devastate your finances very quickly. Our financial advisor, Ray Martin, has some tips on how to prepare for and work through the financial drain of a catastrophic illness.

Preparing for the Worst

Unless you're rich, your medical insurance is your most important asset in protecting you and your loved ones. For your coverage to be an asset, you need to know how it works and how to use it under extreme situations.

Medical Plan: Maximum Benefits

Most insurance plan contracts include limits on the maximum benefits they will pay over the insured's lifetime for medical related expenses. These limits typically range from $250,000 to $1 million, or more. While a million dollars may seem like a lot of coverage, a sequence of unfortunate events can exhaust benefits quickly. Most managed care plans have no limits but are more restrictive on what treatment they will pay for.

What's Covered?

Know what treatments are covered and if there are any exclusions for preexisting conditions. Some medical plans will exclude coverage for preexisting conditions for an amount of time the individual had been uninsured, but generally not more than a year.

Read the Contract

Get a copy of your medical plan's Certificate of Coverage and Evidence of Coverage. Rely on this for how your medical plan works, not the summary of benefits that's typically handed out at open enrollment.

Pay Premiums

Do not allow existing insurance to expire. Pay premiums in full and on time. When you are sick, you often forget about these things, but it's important to remember. It's often difficult or impossible to get new insurance.

For Those Who Are Not Covered

1. First, a person should seek employment with a large company that offers health insurance under their group plan. If the person is too sick to work, the well spouse should consider the same thing. Employer's plans offer coverage for employee and dependents regardless of prior health history.

   
   

2. Self-employed individuals may be able to obtain group coverage through membership in a fraternal or trade association.

   
   

3. People can buy non-group coverage, which is more expensive .

   
   

4. Check your eligibility for Medicare if you are 65 or older or look into Medicaid if you are in a low-income bracket or are unemployed.

   
   

Tax Strategies to Deal With Medical Costs

1. Filing Status – Married couples should consider filing separately if both spouses have income and one spouse has large medical expenses. That's because only medical expenses that exceed 7.5% of adjusted gross income are deductible and splitting the couple's income and deductions could result in more eligible deductions. Alternatively, if two people live together and one has very low income and large medical expenses, they might consider getting married to take advantage of deducting medical expenses. Finally, a widow with dependents can continue to file married for two years after the death of a spouse.

   
   

2. Exemption For Dependents – Claiming someone as a dependent for whom you pay significant medical expenses can save taxes in three ways. First, taxpayers can claim a dependent exemption of $2,750 for each eligible dependent. Second, the taxpayer can use an employeprovided health care expense account to pay for the dependent's out-of-pocket medical expenses with tax-free dollars. Third, eligible medical expenses that exceed 7.5% of the taxpayer's adjusted gross income are deductible.

   
   

3. Deductions For Medical Expenses – The long list of eligible expenses includes: fees for medical and hospital services, insurance premiums, long term care costs, special medical equipment, additions to a home made for medical reasons and even a specially equipped car for the physically challenged. Consult the IRS Publication 502 IRS Publication 502 for information on deductible medical expenses.

   
   

4. Tax-Free Gifts – If you are lucky enough to have a relative who can pay for your expenses, they should be aware that payment of another's medical expenses qualifies for unlimited exclusion from gift or estate taxes. The payments must be made directly to the health care provider and must not be reimbursable, such as by Medicare or by private insurance. Payments for certain medical insurance (health and long term care insurance) or essential transportation to medical care also count.

   
   

Withdraw From Retirement Accounts

While it should only be used as a last resort, penalty-free withdrawals can be taken from retirement accounts to pay for medical expenses, such as distributions from IRAs. Many employers' retirement plans allow for hardship withdrawals that allow employees to take distributions from retirement plans while employed as long as either the distribution is used to pay for medical expenses in excess of deduction limits or the employee meets the disability conditions defined under Social Security.

Use or Sell Life Insurance

Individuals with a short and definable life expectancy can also tap into life insurance benefits under certain conditions. If a doctor certifies that an insured's condition is terminal, the life insurance company may offer to either loan or accelerate some of the bnefits provided under the policy before death. Alternatively, individuals may "viaticate", or sell their policy for a reduced amount to an intermediary in a transaction that is known as a viatical settlement. Under this process, the insured typically receives 50 to 80% of the policy amount.

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