How to Survive Financially After a Health Crisis

By: Damian Borges, CFP, CLU, CH.F.C, Canfin Financial Group, is a practising Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), Chartered Financial Consultant (CH.F.C.) and mortgage agent in the Greater Toronto Area.

 
The women in my family have been plagued with cancer for as long as I can remember. That’s why it was a no-brainer for me when Advocis (The Financial Advisors Association of Canada) and Wellspring asked for volunteers to assist with their Financial Advice Clinic. Over the years, I’ve witnessed many men, women, children and their families fight so hard to beat this disease, exhausting every resource in order to get better, only to emerge cash-strapped at the other end of the tunnel.

I’ve seen maxed-out lines of credit, overdue bills, credit card debt and RRSP withdrawals. I’ve also been frustrated by the many cookie-cutter solutions offered for some very unique problems. For example, what good is a life insurance policy down the road, when you can’t pay your bills today? Unfortunately, these policies generally get cancelled, because these families can’t afford to pay the premiums. I realize that there are some problems that cannot be fixed, and I’ve been forced to accept some sad realities, but I’ve also seen other cases where there were viable solutions left unexplored.

Here are a few steps you should consider before piling on debt or selling your RRSPs:

 

  1.  The first thing you should do is check what you already have. For example, check your group benefits at work, and your personal life insurance and critical illness policies at home. Group insurance policies normally cover you for a multiple of your salary (generally one to three times). Some plans also have a critical illness component which pays a tax-free amount following the diagnosis of a serious illness. Because these group plans are not individually underwritten, there may be an opportunity to increase your coverage without evidence of insurability. Review your plan very carefully.If you have a personal term insurance policy with renewal/conversion privileges exercise these options immediately. These provisions allow you to renew your policy for another term, or convert your policy to a permanent plan without providing evidence of insurability. This means that you simply have to exercise your contractual right to renew or convert your existing policy without having to prove you’re insurable.
  2.  If you have a permanent policy with cash values such as a universal life insurance policy, some companies will allow you to receive a specified amount tax free if you suffer a loss of independence. Generally, you’d have to be unable to perform at least two out of six activities of daily living. For example, if you can no longer dress yourself and no longer bathe yourself, you may be able to access the cash value of the policy on a tax free basis (subject to medical evidence of course).
  3. If your situation is terminal, some life insurance companies have compassionate assistance programs which allow you to receive up to 50 per cent of the face value of the policy. In general, you must have a life expectancy of two years or less to exercise this privilege. This amount plus interest is deducted from the life insurance proceeds at death. The maximum amount varies between companies, and not all companies offer this.
  4. The last strategy is for people with reduced life expectancies who are having trouble making ends meet. Annuities, a staple of the life insurance
    industry, generally pay an amount for life. In this era of low interest rates, annuities have lost much of their appeal. However, if you’ve been given a reduced life expectancy, you can apply to the life insurance company for an impaired annuity. This provides a significantly higher payout for life based on a reduced life expectancy. Also, when purchased with nonregistered funds, the annuity may be taxed on a preferential basis.

Finally, make sure that your family and friends are protected. The cardinal rule of financial planning is to make sure you protect what you cannot control first. This means setting up wills, powers of attorney, life insurance, critical illness and disability insurance policies first before spending on discretionary items. The strategies I mentioned above can be very effective in the right circumstances, but can also be very complex. Please exercise caution before acting on any of these strategies and, as always, seek professional advice. For example, once an annuity is purchased, the transaction cannot be reversed. You should ensure that your advisor has a Certified Financial Planner (CFP) designation, and in this case in particular, you may wish to look for someone who also has a Chartered Life Underwriter (CLU) designation (for expertise in life insurance and estate planning).

He can be reached by e-mail at dborges@canfin.com and you can follow him on twitter
@damianborgesCFP.