When David Johnson (not his real name) was 43 years old, he began feeling sick a lot. After many doctor visits and an increasingly difficult time keeping up with his work as a freelance writer, he was eventually diagnosed with chronic fatigue syndrome. At the age of 46, Johnson finally admitted he didn't have the strength to go on working, and he applied for benefits under his disability insurance plan. Now 63, he has been living with his condition for nearly 20 years.
"The thought of chronic illness never occurred to me," says Johnson. "I imagined either I'd get a fatal disease, or I'd get better. I had no conception of spending the rest of my adult life on disability." However, he says, "buying disability insurance was the best thing I ever did."
Although it's difficult for most of us to imagine this happening to us, having a plan in place to limit the financial consequences of illness can save a lot of grief. Bruce Elfenbein, a financial adviser and retirement specialist with Seeman Holtz in Boca Raton, Fla., says, "There's nothing that will suck your retirement savings away faster than a chronic illness." What to do?
"First and foremost," says Joshua Schefers, a CFP and licensed insurance agent from California, "it's extremely important to have an emergency fund. If you're struck with something unexpected, like a significant illness, you're going to have new expenses. You'll probably be working less, too, so you need savings to get you through the downtime." He recommends having at least three to six months' worth of living expenses in a liquid account. If that's not feasible, he says, the next best thing is to establish a line of credit and keep your credit rating as solid as possible so you're in a position to borrow some cash if you have sudden needs.
If you're not one of the lucky ones with an employer-provided health insurance plan, make sure you take care of this need somehow. The time to buy good health insurance is before you get sick; it can be extremely difficult to get a plan after you need it.
A disability policy is income-replacement insurance. In other words, it does not help to pay for any kind of medical care, nursing home services or any particular expenses. Rather, disability insurance typically provides people with about 55% to 60% of their normal income when they cannot work because of an extended illness or injury.
Elfenbein does not generally advise his clients to purchase this because they tend to be retired. If you're not earning an income at the time you get sick, you will not benefit from disability insurance. For most people, though, this can be a vital form of protection.
Five states (California, Hawaii, New Jersey, New York and Rhode Island) have some kind of state-managed or mandated disability insurance program. Even if you live in one of those places, though, it's unlikely the state plan will be enough if you come down with a chronic condition. State disability is usually a short-term plan only (six months to a year), and you don't participate in it if you are a contractor, small-business owner or unemployed. It's only for people in regular, salary or wage-paying jobs. Some employers offer long-term disability plans; if yours does, make sure you participate in it.
If you need to buy a private plan, what should you look for? Johnson regrets a missed opportunity: "I was naive back then because I never expected I'd really use it," he says. "For only a small amount more, I could have gotten a cost-of-living rider that would make my benefits much better now."
Schefers agrees about the benefits of the cost-of-living, or inflation, rider. He also recommends getting a policy with a "residual rider," which ensures you'll get some benefits if you can still work, but less than you used to. "Some plans don't account for partial disability," he says. "But if your family is counting on you to have a full-time income, and you're only able to work part time for an extended period, you're going to need something to help make up the difference."
Long-Term Care Insurance
Elfenbein's main concern for his senior clients is how to keep their retirement savings from being eroded if they become ill. One of the main ways to do that, he says, is through long-term care insurance, or LTCI. "Long-term care insurance is a great idea," he says, "but by the time most people realize that, they're either too old to afford it or they can't qualify."
Not everyone agrees about what's the right age to buy LTCI, but it's most common to purchase it when people are in their 50s. "People think about long-term care insurance in terms of getting Alzheimer's or breaking a hip," Elfenbein says. "But half of all long-term care insurance is used by people under 65."
Again, Schefers advises most clients to buy a cost-of-living rider. "If you're 80, you don't need the rider," he says. "But if you're the average purchaser, 57 or thereabouts, you may not use the coverage until 10 years or more in the future. If the cost of care goes up 5% per year, you're not purchasing as much coverage as you thought."
Elfenbein particularly likes hybrid products that combine long-term care with an income annuity or a single-premium life insurance policy. In effect, he says, these provide you with LTCI coverage for free. For example, certain annuities will double or triple your regular payout if you end up needing long-term care, and some life insurance policies allow you to accelerate the death benefit to help pay for care if you need it.
It's best to think about the unthinkable when you're well and put some protections in place for yourself and your family. Chronic illness is enough to deal with on its own; you don't need the added stress of facing financial peril.