Financial Planning During Life’s Tough Times

Individuals and their families deal with a wide range of issues when a chronic illness surfaces. Planning ahead requires anticipating negative situations – dependency, lack of funds, disability, incapacity and death – and exploring solutions to these uncertain, hard-to-face problems.

If someone or a family member is seriously ill, but is concerned that they will have insufficient funds, what does one do? Sell everything? Borrow money? Sell a home? Sell a life insurance policy? For starters, remain calm, NAPFA advises. There’s undoubtedly enough stress on the individual and their family right now, so avoid any sudden moves. Instead, use the following tips from NAPFA to make educated financial decisions:

 Review One’s Financial Situation: The most important thing one can do is take a deep breath and take an overall view of a financial situation – from assets to liabilities to borrowing sources.

 Liquidate One’s Cash: After reviewing a situation in detail, begin liquidating cash assets first. There is no tax cost to doing this, and there are no commissions involved.

 Liquidate Low Earning Assets: If one has assets that aren’t earning a tremendous rate of return – money market funds, certificates of deposit, bonds or bond funds – consider selling them. Because an individual is not giving up a lot of return, there probably won’t be any major tax penalties for selling.

 Sell Stocks and Mutual Funds: Consider selling other assets that might be sold without incurring a heavy commission, such as stocks and mutual funds. Be aware that there will be tax implications with this move. However, when an individual is severely ill and not earning an income, the tax on the gains may not be significant.

 Borrow On Margin: In some instances, one might consider borrowing on margin or borrowing against specific stocks held at a brokerage firm. While this could be advantageous, be aware that if the stock price drops an individual could be forced to sell the stock in order to cover the margin at its low. For this reason, such borrowing should be handled with caution.

 Treat Retirement Accounts Carefully: Avoid the temptation to cash in all of the retirement accounts. Not only does one risk taking out more money than is really needed, but one will also have to pay taxes on all withdrawals. While taking money out due to a disability won’t be subject to a tax penalty, it will still be subject to ordinary tax. Borrowing against a 401(k) account is another option that incurs less taxes and no penalties, but it’s best to avoid closing out a very large account in one fell swoop unless it’s absolutely necessary.

 Use Home Equity Lines Of Credit: Home equity lines of credit are not only relatively inexpensive, but are often tax-deductible ways of borrowing. If, prior to an illness, there was a home equity line of credit established, it might be a good idea to draw on it. Unfortunately, setting up a new line might be difficult since banks insist that one has earnings, which may be difficult to prove during a chronic illness. As a result, this option is most viable prior to illness, although it may be available only under certain circumstances.

 Utilize Life Insurance Policies: An individual can do this either by taking out a loan against a personal policy, or – if available – by using what are known as "living benefits" or “accelerated benefits,” in which the insured can draw down on the value of the policy during a terminal illness. If living benefits exist in a policy, they should be carefully reviewed as a viable alternative. Those with policies that feature relatively low borrowing interest rates may wish to borrow on the cash value of their policy or take the cash value of the policy. However, cashing it in is not advisable because doing so will take away a policy that’s probably worth more now than it has ever been.

 Tap Into Family Sources: For some individuals, borrowing needed cash from a family member – rather than cashing everything in – might make sense. While no one wants to be a burden to others, it might make more sense than purely liquidating everything one has. Many family members will be inclined to do not only what’s right in the short-term, but may also understand the long-term benefits of providing a loan during a serious illness. However, this is highly dependent on the family circumstances.

 Evaluate Reverse Mortgages: Depending on the severity of the condition and the amount of time there is available, an individual might consider a reverse mortgage. With this vehicle, homeowners with a lack of income can borrow against the equity in their home. NAPFA advises using caution with reverse mortgages, which can incur substantial costs and usually have a slow approval time.

Specific Choices

Borrowing on credit cards can be considered an option, but interest rates on such loans are considerably higher than most other choices listed above. Because of this, it’s a choice that should be examined carefully.

• Accept a Viatical Settlement: A viatical settlement is where one sells his or her life insurance policy to a third party for a fraction of the policy’s face value. Then, when the policy-holder dies, their beneficiaries receive no additional money other than what was already paid out. If the individual dies sooner than expected, it could prove to be a windfall to the viatical company. If they die later, it will merely reduce their profit. Companies offering viatical settlements came on the scene about a decade ago, often lending to patients with HIV. Now, because of medical advances, such settlements are being marketed to individuals with cancer.
• Take Out Life Insurance Loans: Recently, several companies have surfaced that lend money against the value of a life insurance policy. These are not insurance companies, and unlike viatical settlements, an individual is not signing over an entire policy, but only paying interest on the loan. It’s relatively new alternative, and one which should be considered very carefully. While the stated interest rates on these loans are reasonable, the associated fees and charges can dramatically increase the cost of this type of borrowing to a level that is uncomfortably high.

Perhaps the best way to minimize feelings of helplessness and stress caused by chronic illness is to plan ahead. Overall financial situations can be examined in order to understand what one’s needs will be and then make an orderly decision. When one is aware of all of the options, and understands the pluses and minuses of each, he or she is enabled to make a wiser decision. At the same time, it may be wise retain the counsel of a professional comprehensive advisor – one who is not working on commission and who does not have a conflict of interest. The advisor should examine one’s personal situation and that of the family in general in order to suggest the wisest course of action.

Financial Planning For Major Life Changes

Some situations that require special consideration include changes in marital status and the need to support grown children and/or elderly relatives. Marriage, divorce, or death of a spouse results in the need to revise financial plans and money management strategies.

Before being married, individuals should discuss their money attitudes and financial affairs. Marriage may create a two income household, raising the concerns addressed above. It is important to take an inventory of one’s financial assets and liabilities, including savings and checking accounts; credit card accounts, and outstanding bills; auto, health, and life insurance policies; and investment portfolios. An individual may want to eliminate some credit cards if there is overlap; too many cards can hurt one’s credit rating, and most people only need one or two. Each partner should have a card in his or her name to establish a credit record. Compare employee benefits plans to figure out the lowest-cost source of health insurance coverage and coordinate other benefits.

The beneficiary on the life insurance policy will need to be changed. If neither party has life insurance they might want to consider buying term insurance. This could be done effectively through an employer.

Short-Term Financial Goals

Short-term financial goals are set each year; they cover a twelve month period and should be consistent with established long-term goals. These short-term goals become the key input for the cash budget --a tool used to plan for short-term income and expenditures. The individual’s or family’s immediate goals, expected income for the year, and long-term financial goals must all be taken into account when defining short-term goals.

In addition, consideration must be given to the latest financial position, as reflected by the current balance sheet, and spending in the year immediately preceding, as reflected in the income and expenditures statement for that period. Short-term planning should also include establishing an emergency fund with three to six months’ worth of income. This special savings account serves as a safety valve in case of financial emergencies -- for example, a temporary loss of income.