Health issues and chronic diseases can significantly impact your financial planning. As a financial advisor, I often encounter clients grappling with these challenges, particularly in the later stages of life. Let me share a story about a client, Lisa, and how we navigated the financial burdens posed by her health conditions. By understanding and implementing key financial solutions, you can manage these burdens effectively and secure your financial future.
Lisa’s Story
Lisa, a vibrant 55-year-old woman, came to me a few years after her divorce. She managed her household and finances independently for the first time in decades. Unfortunately, Lisa was diagnosed with a chronic illness that required ongoing medical care and had the potential to significantly impact her financial plans.
She was unnerved by the amount of money she was now having to spend on traditional and non-traditional health providers, and the uncertainty about her prognosis and its potential impact on her financial future was increasing her anxiety.
This blog will outline the four financial strategies used to help Lisa manage the impacts of her health and chronic disease based on her financial plans.
1. Maximizing Retirement Accounts
The “problem” with chronic illness is that we don’t know if it will impact longevity. Many people live into their 90s with chronic diseases that are well-managed. With that in mind, it’s important to manage expenses for today but also in the future, preserving one’s financial flexibility and options.
Clients who are experiencing increased expenses often look to stop “spending” in other parts of their lives. But cutting back on retirement savings should be a last resort. For Lisa, this meant making the most of her 401(k) and IRA contributions. Despite her medical expenses, it was crucial for Lisa to continue contributing to these accounts to ensure long-term financial stability.
One frequently overlooked advantage to having a tax-deferred account is that in the future, should you need to spend significant money on health care, those expenses may create deductions that might help offset the tax liability owed when drawing off retirement accounts to meet the expenses.
401(k)s and IRAs
Employer retirement accounts like 401(k)s, 403(b)s, 457 plan, etc. offer tax advantages that can be beneficial now and potential later. Contributions to a 401(k) are made pre-tax, reducing your taxable income for the year, thereby reducing incomes taxes to be paid. Paying less in taxes means having more money for medical treatments.
Options for Self-Employed Individuals
For those who are self-employed or own a small business, a SEP-IRA or a solo 401(k) are excellent options. Those allow for higher contribution limits compared to traditional IRAs, enabling you to save more aggressively for retirement. If Lisa had been self-employed, we would have considered this option to maximize her retirement savings.
2. Utilizing Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are another powerful tool for managing medical expenses while securing tax benefits. For Lisa, who had a high-deductible health plan, opening an HSA was a game-changer.
Tax Advantages
Contributions to an HSA are tax-deductible, and the funds can be used tax-free for qualified medical expenses. This dual tax advantage helped Lisa manage her out-of-pocket medical costs more effectively. Moreover, the unused funds in an HSA roll over from year to year, and the account can even be used as an additional retirement savings vehicle after age 65.
Investment Opportunities
HSAs also offer investment opportunities. By investing the funds in her HSA, Lisa could grow her savings over time, providing a financial cushion for future medical expenses. This approach not only helped her manage her current medical costs but also ensured that she had resources available for any future health-related expenses. If you are using this HSA money in real-time, be mindful about the risk you take with those investments.
3. Explore obtaining a long-term care policy
Not all chronic conditions will keep clients from qualifying for a product that might help with medical payments in the future. In fact, some products do not do any health underwriting at all.
While Lisa was still relatively healthy, we were able to explore long-term care products that would provide some additional money should she need additional help with her care.
You will want to “run the numbers” on these options and make a conscious decision about whether they make financial sense. Often clients will choose to obtain the product even when the numbers are about even because having a solution reduces their anxiety.
4. Leveraging Life Insurance with Living Benefits
Life insurance is often overlooked as a financial tool for managing health-related financial burdens. However, policies with living benefits can provide critical financial support during serious health events. These tend to be employed when diseases go from chronic to acute or when insurance will not pay for treatment.
Understanding Living Benefits
Living benefits, also known as accelerated death benefits, allow policyholders to access a portion of their life insurance benefits while still alive in the case of a terminal or chronic illness. For Lisa, having a life insurance policy with living benefits provided her with a lump sum payment that she could use to cover her medical bills and other expenses.
Types of Policies
There are various types of life insurance policies that offer living benefits, including term life, whole life, and universal life insurance. Depending on your needs and financial situation, one of these policies may be more suitable. In Lisa’s case, we reviewed her existing policies and made adjustments to ensure she had adequate coverage with living benefits.
This is also a good time to review one’s life insurance benefits. If you are leaving behind a spouse/partner or children, knowing how that insurance will impact your estate and your loved ones also is anxiety-reducing.
The Importance of Proactive Financial Planning
Managing the financial impacts of health and chronic disease requires careful planning and the right financial tools. By maximizing retirement accounts, utilizing Health Savings Accounts, exploring long-term care product options, and leveraging life insurance with living benefits, you can effectively manage these burdens and secure your financial future.
Lisa’s story is a testament to the importance of proactive financial planning. Despite the challenges she faced, we were able to create a strategy that not only addressed her immediate needs but also ensured her long-term financial stability. For more detailed insights on managing financial burdens related to health issues, you can refer to this comprehensive study: Managing Financial Burdens from Health and Chronic Disease.
Secure Your Financial Future
If you find yourself in a similar situation as Lisa, or if you want to ensure that you are prepared for any future health-related financial burdens, I am here to support you. My goal is to help you navigate these challenges and achieve your financial goals. After all, who doesn’t enjoy a bit of financial security along with their morning coffee?
Feel free to reach out to schedule a consultation at Lanning Financial. Together, we can ensure that your financial future remains secure, no matter what health challenges you may face. Because, let’s be honest, stress about finances is the last thing anyone needs.
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
