Planning for the Terminally Ill

Unanticipated death from terminal illness or accident is difficult to plan through. It’s not the same as Medicaid or cash flow planning for the elderly. Many financial planning principles are reversed. Princess Diana’s accident and Mother Teresa’s recent death got me thinking. If you or I had extended family members who’d been diagnosed with AIDS, brain cancer, terminal kidney disease or other catastrophe, here are some things we would need to consider. Let’s assume an anticipated shortened life-span of less than 4 years and a total cost of health care of $85,000 to $1,000,000.

Health Insurance: Review long term care provisions and services available with the doctor. There are limits to all health coverage. Will you be exceeding the limit? When? How will you take care of the co-pay portion of the hospital and doctor’s bills? As long as the terminally ill person is working, there are open enrollment periods from companies that ask no underwriting questions and who ignore pre-existing conditions if transferring in or from another plan. I would see what could be done to have the best coverage. I wouldn’t worry about price, but I would look for flexibility for the dying person.

Disability Insurance: The terminally ill person should seek disability leave with a care to the definitions in the policy. Insurance companies do not like to pay disability benefits. If all of the stipulations of the contract are not met, there could be a court battle with the company to receive the benefits. What are the elimination periods available in disability policies? I’d check the benefit periods, too. Does the insurance company’s doctor have to be involved in treatment and in medical records in order to continue to have claims reimbursed? Are there pre-existing conditions or exclusions that apply? Does a waiver exist to avoid the continued payment of disability premiums? Medicare coverage kicks in after 29 continuous months of disability. Can we get there on existing assets and coverages?

Life Insurance: I’d look for a waiver of premium rider on life insurance. Is there a contestable period during which the company can deny claims? Can the policy be converted to a permanent policy at a higher annual premium with better payouts or better contract provisions? Some term policies have guaranteed issue provisions that allow the purchase of additional insurance without underwriting during certain periods. We might consider a private arrangement within the family for the stricken person to receive life insurance death benefit cash now in order to afford upgraded medical care. The family member whose cash is used would then receive the death benefit to pay back the loan. Viatical arrangements can also be made with public companies, but the expense is high.

Cash Flow and Investment Planning: I’d maximize credit relationships. Depending on the situation, I’d refinance a house to increase cash reserves. I would not prepay mortgages or student loans. I wouldn’t pay late either. Dependable liquidity is primary. Long-term investments should probably be liquidated, but may be held, if tax basis is very low, by using margin loans to be satisfied after death.

Retirement Plans: I’d check plan documents to see if the 10% penalty for early withdrawal and vesting requirements are waived for the terminally ill with proper documentation. I’d use an IRA rollover if appropriate, perhaps to a Roth IRA, to postpone taxes until after death on the new four-year tax payment rule.

These are ticklish issues that neither Princess Diana’s family nor Mother Teresa’s Order had to face. We just might.