| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
Staying Afloat When Your Health Sinks These are the toughest financial decisions you'll ever make Harry Mills had just bought a second dental practice when he was stricken with plasma cell cancer. For two years, he battled to make payments on his new office. By 1997, debilitated by both illness and intensive treatments, the Oshkosh (Neb.) dentist had fallen far behind. But Mills still had one big asset--a $250,000 life insurance policy. So last year, he tapped it for $100,000. By the time he died in July, all his debts were paid off. ''He didn't have to think he was a failure,'' says his widow, Shirley. ''He was able to die with dignity.'' As the Mills learned, it is not easy to raise cash once you're diagnosed with a terminal illness. But there are ways to stay financially afloat in your final months. ''Look at where the dollars are,'' says Herbert Daroff, a Boston financial planner. ''The value of your house, your life insurance, and your retirement assets.'' If you get a terminal diagnosis, give yourself time to absorb the doctor's words. Then get in touch with a financial expert--a planner, broker, or lawyer you trust. The choices you make will depend on your family, resources, and life expectancy. If you have young children, holding on to assets may be a key goal. But if you have three years to live and can no longer work, you may need steady income to pay medical costs and living expenses. AVOID TAXES. First, look at your taxable investment portfolio. Shifting a bit toward bonds and dividend-paying stocks can help boost cash flow. But planners warn against wholesale reallocation. For one thing, you may generate hefty capital-gains taxes, which your heirs will avoid if your assets are not sold until after you die. You can also tap tax-deferred savings. One way: Borrow up to $50,000 against employer-based retirement plans such as 401(k)s and 403(b)s. But check your plan's rules, since some have restrictions or don't allow borrowing at all. Another option is to make an early withdrawal from an employer-sponsored plan or individual retirement account (IRA). You'll pay income tax on the distribution. But it may be exempt from the normal 10% penalty for early withdrawals. The rules are complex, so check with an accountant. Your home may be a major source of untapped cash. Consider a second mortgage or a home-equity loan. Since cash flow is critical, look for an interest-only note that won't require principal payments until after your death. Special products for the terminally ill are rare, but a balloon-type loan may fit your needs. You'll need to show income to pass a credit check, so try to apply while you are still working. You can also use disability payments to help qualify. Another option is a reverse mortgage. You borrow against your home but make no payments until you leave, sell, or die. You can take a lump sum, line of credit, or regular monthly payment. But to qualify, you have to be at least 62. As with any mortgage, expect to pay upfront fees for appraisals and the like. Some reverse mortgages also carry costs, sometimes called ''equity-sharing'' fees, that can run 3% or higher. These add-ons may make reverse mortgages a bad idea if you have only a few months to live. Moreover, if your heirs can't repay the debt, they could lose the house. For more information, call the American Association of Retired Persons Home Equity Information Center (202 434-6044). Or check the National Center for Home Equity Conversion's Web site (www.reverse.org). You can also take equity out of your home by selling it and renting back. That way you, and perhaps your spouse, can remain in your home. Ask friends or relatives if they are interested in such an arrangement. But put everything in writing. ''Make it legal,'' says Laura Addington, a Greenville (Tex.) financial planner. ''Make it clear what the expectations are on both sides.'' OVERLOOKED. An often overlooked source of income is life insurance. You can tap policies that have cash value, such as whole or universal life, in several ways. The simplest: Take a loan. Most are at near-market rates. And ask about accelerated death-benefit riders. If you have less than six months to live, such policies will pay up to half their value before you die. These options won't work if you have more common term insurance. But you can sell any policy to investors at a discount to its face value, an arrangement called a viatical settlement. You can arrange a sale through a planner or insurance agent, or look for a broker who will bid out your policy for the best return. What you get depends on your life expectancy, but figure on 60% to 80% of the policy's value. Viaticals work best for those who live a relatively long time after selling. If you sell a $100,000 policy for $60,000 and die in six months, you will have paid a staggering 133% effective annual interest rate. But if you live three years, the annual cost drops to 22%. Remember, too, that because you are selling, rather than borrowing, you may have to pay tax. Generally, the income is tax-free only if a doctor certifies you have two years or less to live and if the company that buys your policy meets minimum Internal Revenue Service standards. Check out the company. Be sure it is regulated by a state insurance commission. You can also contact the Viatical Assn. of America, which will provide a list of member companies (800 842-9811, www.viatical.org). And shop around. ''Contact a couple of different companies to get the best offer,'' says Gary Chodes, president of Viaticus, a unit of insurer CNA Financial. Instead of selling a term policy, you can borrow against it. Harry Mills got a loan from Salt Lake City's LifeWise Family Financial Security (800 219-7385, www.lifewisefinancial.com). The company will lend up to 85% of a policy's value, depending on your life expectancy. It pays your premiums, and you repay nothing while you live. But your interest obligations will be compounding all the while. After you die, the company deducts interest and fees, and returns to your heirs any of the policy's remaining value. LifeWise charges an application fee of 2% to 3% of the total loan, and its annual interest rates average 15%. Shirley Mills says her loan cost about $16,000. ''We don't claim this is cheap money,'' says LifeWise chief executive Mark Livingston. None of these alternatives is easy. And scrambling for money in the face of terminal illness is as tough a financial decision as you'll ever have to make. But you do have options. BY HOWARD GLECKMAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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