By Chip Hollingsworth, founder of the Federal Employee Benefits Assistance Agency LLC
A medical emergency has more than one face. First, there is an emotional face that deals with the shock and surprise you experience during a time like this. But when the shock wears off, here comes the second face of “how do I pay for such an event?”
The first step in being prepared for a medical emergency is to build up an emergency fund. It’s important to note the underlying rule that comes along with an emergency fund: don’t touch it unless it’s actually an emergency. This may seem like common sense, but ignoring this rule is what caught a lot of people flat-footed in the financial crisis. They had already maxed out their credit cards, drawn down their home equity line of credit, and borrowed against their retirement plan so that they had no reserves left when they lost their jobs or otherwise saw their income drop. If you’ve already drawn on your reserves but have so far avoided any immediate emergency, the first order of business is to restore these safety nets—if you can—so they are there when you need them.
Many financial advisors suggest holding six months of living expenses. Consider if my monthly bills are $3000 per month this amounts to about $18,000 in a ready cash position. Clients often argue that this is money that could be used for growth and remain liquid. However, you don’t want your emergency fund at the whim of the capital markets. Keep it safe and liquid. This means you may only earn a meager 1% when you could be earning 7%. Consider the difference of 6% or about $1000 annually, the price you pay for liquidity and safety. This is a hands-off fund, don’t use it for anything except emergencies. Make creating this emergency fund a targeted intentional effort. Take steps to change your spending habits, until you have at least six months of expenses saved in an account.
A personal example of mine demonstrates just how important building an emergency resource can be. One of our firm’s senior manager’s wife passed recently after having cancer for 20 years. While the disease management eventually became a way of life, at first, it was very much a medical emergency. Throughout the time she had cancer, insurance paid nearly a million dollars for her care. The couple themselves paid thousands. Fortunately for them, his professional background was in financial planning and they were financially prepared with emergency funds and medical documents, which if absent, could have added to the emotional face of their emergency.
The next step in preparing for a medical emergency is to be ready for the unexpected, by getting all the necessary documents and procedures in order. This same manager who lost his wife, has a passion for flying. I once asked him, “What is the first thing you do if the cabin fills with smoke and you are at 5000 feet”. His reply was, “fly the plane”. So here are some key items to do, as you fly the plane and deal with the unexpected.
Have completed in advance, your health care documents. Create a “go and grab” folder that includes an Advance Directive, a Health Care Proxy, Power of Attorney, copy of your social security card, insurance card and a list of names and contacts that may need to know you are having a medical emergency. Tell the people who are closest to you where to find this grab and go file.
Include all the obvious names on your list, but also include your financial advisor, your insurance agent, your attorney, your clergy, and any neighbors who may have to care for your property in your absence.
Various types of insurance are of course designed to help protect against financial emergencies. Health insurance, obviously, is obligatory given the high cost of care. Life insurance, mortgage life insurance, homeowner’s insurance, collision insurance, disability insurance, long-term care insurance, air ambulance coverage may need to be included in your coverages. Check your health coverage for changes in benefits should you travel out of the country.
If you’re a parent of young children, or the caregiver of another, have a plan established for who is to provide care during your absence.
Any type of unexpected emergency, especially medical, can be difficult to handle. Being prepared with the reserved funds and proper protocol in place can make a stressful experience just a little bit easier!