This week at work has been interesting, what with Ike bearing down on us and most of the coast evacuating to our already over-crowded city. Austin wasn’t really prepared to handle the influx of people and those who didn’t have family here were left to sleep on concrete floors as the hotels were pretty full. I won’t even regale you with the horror stories of the convalescent. Suffice it to say Ike caused a lot of problems for us here in Texas.

That being said, there were several people I spoke to this week about being financially prepared. Obviously the need to be financially prepared during a natural disaster is important and I wrote a piece on that when Gustav tore through the Gulf. But, in this piece, I thought we’d talk about being financially prepared for illness. Most people don’t think about this until it’s too late and then they’re struggling to make ends meet.

Case in point. I had a young couple come in to the credit union this weekend wanting to refinance their car because they needed the 45 day reprieve from making their payment. Doing so would be a hit against their credit – something they really couldn’t afford – and would have only saved them about $3. There was, of course, a better option which I told them about. Since they wanted to essentially skip a payment, I was able to advance their payment by a month and give them a little window of time. It turns out, they were struggling because the wife had thyroid cancer and had been out of work for over a month.

Neither of the two had any disability insurance to cover the incident, nor did they have anything in savings. The more I talked to this couple, the more I realized they were in trouble. It was more than just the car they were struggling to pay, it was all of their bills. The silver lining in their story was that the wife was given permission to go back to work. Her income would help tremendously. Together we wrote up a plan to get them money in their savings account, their debts paid off, and saving for a house as they wanted to buy a house once they got out of debt. It was a 3-5 year plan that we broke down in six month increments so they didn’t feel overwhelmed.

But, it got me to thinking about how many people are really financially prepared should they or someone they care for become seriously ill. So, I thought I’d talk about the key things to think about.

Insurance

Most of us have life insurance, some sort of short-term disability offered through our employer and sometimes we have accidental death and dismemberment, something we’re pretty sure we’ll never need but better to be safe than sorry. Yet the one thing I consistently find is what you have isn’t enough if something were to happen. First of all, life insurance only pays out if you die. It doesn’t cover you during an illness that leaves you out of work for six months to a year. Since we’re talking illness, it doesn’t really count. Secondly, most short-term disability (and even long-term) plans require a waiting period before they’ll disburse any funds to you and then, when they do pay out, it’s at a fraction of your salary. When and how much you get paid all depends on your plan and the insurance you have.

So, get to know your insurance and consider how much you’ll need. If your insurance only pays out a third of your salary, could you live off of that? Most people can’t sustain a loss of two-thirds of their salary. This is why the 3-6 months of savings is so important. It will help in situations like this. Something else to consider is taking the payment protection insurance that most lenders offer with their loans. I know you want to save money where you can, but paying a few dollars more every month now will afford you the opportunity to skip payments later if you become disabled. Being able to skip payments on loans will help reduce the amount of money you need to live off of every month.

Keep Access To Cash

It’s important that you have access to cash in some form. Like I said, your insurance isn’t going to pay your full salary for the time that you’re on disability. If you have a serious condition, you run the risk of either running out of time on your insurance, or being excluded all together. Again, it’s important to familiarize yourself with your insurance so you’re prepared for either outcome.

In any event, having access to liquid cash will be a necessity if you’re ill. Having your money tied up won’t do you any good when it comes time to pay the bills, pursue treatments, or buy medicine. I cannot stress enough how important an emergency fund is – at least 3-6 months of expenses saved up. If you’re prone to illness, or something runs in the family and you’re showing symptoms, I would recommend more.

Another option for cash is to consider a home equity line of credit. If you own your home and have equity built up, you can turn that into cash through a line of credit. You may not need to use it, but it’s there if you do; and the great thing about the line of credit is that you don’t pay for it unless you do use it. Each state has their own rules of how the product can be used, so you’ll want to check with your bank, but it’s a great way to tap into unused equity in your home and can be good in the event of an emergency.

Negotiation Rules Still Apply

I would say the number two reason behind ruined credit reports is medical bills. Number one would be careless youth – things we did when we were young that many don’t want to own up to. Still, the point is that medical bills are expensive and if you didn’t have the money before you went on disability, you’ll spend a good portion of your time and money trying to play catch up when you go back to work. It can be difficult and time-consuming. Unfortunately, time is the one thing that tends to hurt you when it comes to bills. The longer you take, the more it destroys your credit rating.

But, there is some good news. Most people don’t realize that they can negotiate their medical bills with hospitals. Many like to avoid it, fearing it’s inappropriate, but hospitals are just like any other collection agency, they want to collect. If presented in a tactful way, you may be able to get your medical bills reduced. Plus, if you’re dealing with a large medical bill – not uncommon with some illnesses – you may want to consider a medical audit to ensure that you weren’t overcharged for anything. Typically a medical audit will cost $1000 to $4000, so it’s certainly not for those with a $5000 medical bill. But, someone that has $100,000 or more may find it valuable. There have been cases where $30,000 to $40,000 of expenses were never rendered, overcharged, or improperly coded. That’s a pretty big chunk of money you could save.

Obviously there’s more that goes into financially preparing for an illness and this post barely scratches the tip of the iceberg. If illness runs in the family, do yourself a favor and sit with someone that can help you map out a game plan. It’s better to be prepared and nothing happen then to think you’ll be fine and get hit by a proverbial truck.

How financially prepared are you for an illness? Have you considered these things, or do you think like the majority of people in the world and believe it won’t happen to you?

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