Most of us take our health for granted. Until it disappears, at which point your whole world changes.
That day could come tomorrow, or it could come in 50 years from now. But sooner or later your health fails you unexpectedly, and the ensuing crisis is hard enough without the double hit of a financial crisis alongside your health crisis. Health care can be astronomically expensive, especially for emergency or critical care that doesn’t offer you the flexibility to shop around for the best bargains.
So, while you feel young and strong and virile today, take the following steps to prevent a financial emergency from compounding your health problems, whenever they happen to strike.
The Role of Health Insurance
There are a few types of insurance that everyone needs regardless of age, wealth, or health. Health insurance ranks first among them.
Too many young people make the mistake of thinking that health insurance exists to lower their routine health care costs because they’ve never incurred anything else. They entertain faulty logic like “It costs less for me to just pay out of pocket for my occasional doctor’s appointment or prescription drug, so why bother shelling out thousands of dollars every year for health insurance?”
The answer is as simple as it is unpalatable to think about: because you might need $100,000 in cancer treatments. Or heart disease therapies, or injury reconstruction, or any number of other health emergency scenarios.
Of course, that doesn’t mean you need to rush out and buy the most expensive health insurance plan on the market, either.
Balancing Premium vs. Deductible
As a general rule, the more you spend on monthly premiums, the less you spend out of pocket on incurred medical expenses. You can buy a low-cost policy with a high deductible — the amount you need to pay out of pocket before your health insurance kicks in — or you can spend an arm and a leg on a high-end policy that covers nearly every medical expense you could possibly incur. And, of course, there is an endless spectrum of options in between.
Young, healthy people who expect no medical expenses other than annual checkups and the occasional prescription drug usually opt for low-premium, high-deductible insurance. They have a low risk of incurring high medical bills, so they typically just need “doomsday” coverage for a catastrophic health event. It makes sense to avoid high premiums in favor of setting aside more money in a Lively health savings account (HSA) to cover your eventual costs (more on HSAs shortly).
People at a higher risk of major medical expenses need greater protection. For them, it often makes sense to spend more on a more comprehensive health plan, which may cost more each month but lets you sleep at night knowing that you can financially cover any health problems that come your way.
Choose the best health insurance plan based on your own personal medical risks and needs.
Health Insurance Without Employer Coverage
Not everyone enjoys excellent employer health coverage — or, for that matter, any employer-subsidized health coverage.
Fortunately, Americans have more health care options than ever before. From health care sharing ministries to the ACA health care exchanges, private marketplaces to association health plans, research all your options for health insurance without a job.
Or you could get health coverage through a part-time job or through your spouse’s job. In my family, my wife’s W-2 job provides the stability and health insurance benefits while my self-employed income adds flexibility and higher upside potential.
As the gig economy continues growing, expect to see more health insurance options for the self-employed as well.
Cash Reserves
All but the priciest health insurance policies include some deductible, copay, or other patient expenses. This means that you need some of your own cash at the ready for a medical emergency, even if you’re insured.
How much cash depends on your deductible, perceived risk of health emergencies, the stability of your income, and the stability of your expenses. The higher your deductible, the more cash you need in reserve to cover an emergency. If you consider yourself at higher risk of health troubles, you should also keep a higher emergency fund.
Emergency Fund
An emergency fund protects you from more than just medical emergencies. Financial emergencies could strike from a job loss, reduction of hours, a jump in your rent or variable interest rate, an unexpected move, or the death or illness of a loved one.
Or a combination of several emergencies at once.
One trouble with health emergencies is that they often come with a loss of income. You may not be able to work for an extended period, and can’t even necessarily count on keeping your job, much less your paycheck.
The Family Medical Leave Act (FMLA) ensures you 12 weeks of leave if you work for a company with 50 or more employees and you’ve worked there for a year or more. But your employer doesn’t have to continue paying you while you’re not working, and it doesn’t help employees at small businesses, the self-employed, or gig economy workers.
If you don’t have an emergency fund, start by saving up one month’s worth of living expenses. From there, you can decide how much you personally need, based on your deductible, health risks, and the stability of your income and expenses.
I also like to keep an unused credit card as an additional layer to my emergency fund. In a pinch, I can tap it to cover expenses.
Of course, you don’t need to settle for holding your emergency fund in all cash, or even a high-interest savings account at CIT Bank. You can hold some of it in a tax-sheltered account like an HSA for maximum returns and tax protections.
HSAs
If you keep a high-deductible health plan (HDHP), you qualify to open a health savings account. Which you absolutely, positively want to do.
These accounts come with the best tax benefits of any account in the U.S. tax code. In the year you make contributions, you get to deduct them in full, similar to a traditional IRA. The money then grows tax-free, and you can withdraw it any time tax-free, as long as you use the money for qualified health expenses — a generously broad umbrella. In other words, you get both the tax advantages of traditional IRAs and Roth IRAs, without the tradeoffs that come with either.
To qualify for contributing to an HSA, you must have health insurance with a deductible of at least $1,400 ($2,800 for families) in tax year 2021, unchanged from 2020. You can contribute a maximum of $3,600 to your HSA in 2021 ($7,200 for families).
These accounts offer the perfect place to hold your medical emergency fund, so research the best places to open an HSA if you don’t already have one. One of our favorite companies is Lively.
Optional Income Insurance Policies
As touched on above, the risk of health emergencies doesn’t end with the actual medical bills. You may lose your ability to work if you suffer an accident or other medical crisis.
Consider the following other insurance types to protect your family’s income.
Disability Insurance
If you become unable to work because of a disability, disability insurance through a company like Breeze pays you and your family ongoing income. It comes in two varieties: short-term and long-term disability insurance.
Short-term disability insurance pays you for up to a maximum of 26 weeks, usually between 50% to 70% of your previous income. Long-term disability insurance typically pays you for a period of two to 10 years. But it could cover you until age 65, or in rare cases even after 65 — or, of course, until you are able to return to work.
Unlike health insurance, not everyone needs long-term disability insurance. People whose work requires physical activity should consider it, as should single-income households. I personally don’t keep it because both my wife and I earn money, and we maintain such a high savings rate and such low living expenses that we could live on either of our incomes if one of us had to stop working.
And the closer you get to financial independence, the less you rely on your active income to live, and so the less you need to worry about carrying disability insurance.
Life Insurance
The same concept applies to term life insurance: If something happens to you medically and you kick the bucket, life insurance protects your family by paying ongoing income benefits.
There are several types of life insurance, and the benefits get confusing quickly. Speak with several insurance experts — who aren’t trying to sell you a policy — before deciding on a type of insurance or how much life insurance coverage you need.
Note that the answer may be “none.” The concept of life insurance dates back to when nearly every household was a single-income household, and when the loss of a single breadwinner would financially cripple the surviving family. Again, I don’t personally buy life insurance because my wife and I live frugally on a fraction of our income and could financially survive the loss of either one of us as earners. Not carrying extra insurance leaves us free to invest more of our income and build wealth faster.
Legal Preparations for a Medical Emergency
Financial preparations for health emergencies extend beyond insurance and savings. You also need to ensure that your wishes are carried out, both financially and medically, should you become unable to execute them yourself.
Fiduciary and Estate Planning
If you become incapacitated, who will manage your money?
Incapacitation could mean becoming mentally or physically disabled, or simply so sick that you can’t oversee your finances. Finances that include paying your bills, managing your investments, keeping your insurance policies current, and all the other money matters in modern life.
You can set a financial proxy by signing a power of attorney, authorizing another person to act on your behalf under specific circumstances. But don’t stop there — make sure you create a will to outline your financial wishes for not just incapacitation but also your death. After all, most of us never become incapacitated, but we all die, so we all need to plan our estates.
And as morbid and unpleasant as it sounds, young adults die too. Any of us could get hit by a bus crossing the street this afternoon, so young people need wills too. With companies like Trust & Will, you can set up a will in a matter of minutes.
Medical Planning
If you become incapacitated, someone needs to make not only your financial decisions but also your medical decisions.
Create a living will to declare your wishes before you lose the ability to communicate them. Similarly, sign a POLST form (physician orders for life-sustaining treatment) with your doctor. It’s not a legal document like your living will, but it makes your medical desires crystal clear for your doctor and other health care providers.
You should also declare a health care proxy to make decisions on your behalf, which you can also do through a power of attorney.
Other Contingency Planning for Health Problems
Health problems can stop you from doing, well, everything. That means they put all of your long-term goals at risk.
To fully protect against health-related risks, take a holistic view of your financial goals and how medical problems could affect them.
Build Flexibility Into Your Budget
When people suffer a loss of income, it usually takes them many months before they trim their budget to reflect their lower earnings — months that leave their consumer debts piling ever higher, for a more difficult recovery.
To better prepare for a medical or other emergency, review your budget to create a flexible contingency version. Which expenses could you eliminate or reduce if poor health forces you to stop working? Rather than starting small with expenses like cutting your cable TV, start with your three largest expenses: housing, transportation, and food.
Those three categories alone make up around two-thirds of the average American household’s spending, according to the U.S. Bureau of Labor Statistics. Come up with contingency plans to slash them if needed, because budgeting will be the last thing on your mind if you get hit with a medical emergency.
But don’t stop with those big expenses. Put every expense under a microscope, and come up with an emergency budget. Who knows, you may even decide to trim some of the fat now, without waiting for an emergency to force the issue.
Save More Earlier to Protect Against Forced Early Retirement
In a worrying trend, older workers increasingly find themselves forced out of higher-paying jobs. One multidecade study by ProPublica and the Urban Institute found that 56% of workers over age 50 have been pushed out of their jobs before they were ready to retire. And once ousted from their senior positions, they have a much harder time finding jobs at the same salary.
To protect against forced early retirement, bump up your target age for reaching financial independence, able to cover your living expenses with passive income alone. Plan out your retirement strategy to reach financial independence a decade early, if possible.
You could find yourself forced to retire early not just from being laid off, but also due to health problems. You just don’t know how long you’ll be able to work, and you can’t count on working through age 65 or beyond.
Reaching financial independence at a young age allows you the freedom to keep working and building more wealth if you want, or to switch careers to a more meaningful or fun job. You could even volunteer full-time if you so choose to really give back.
And if your health gives out before you were planning to retire, you have a comfortable nest egg to live on for the rest of your days.
Final Word
If you do find yourself in financial trouble over medical expenses, don’t be afraid to ask for help.
That starts with asking pharmacies for generic versions of prescriptions, asking doctors for discounts or payment plans, asking for crowdfunding help from your friends and family members.
You may also be able to deduct health care expenses on your tax return. It doesn’t put every dollar back in your pocket, but it could put 30 cents from each dollar back in your pocket in the form of lower taxes.
But the best way you can minimize the impact of health emergencies is to prepare for them in advance. Maintain health insurance at all times and keep a plush emergency fund. Consider optional insurance policies like disability and life insurance, put your legal paperwork in order, and keep your budget lean and your savings strong to be ready for whatever life throws at you.
