Grim diagnosis isn't a license to splurge

When James Tissot of New York City learned he was HIV-positive, he assumed he didn't have long to live. He checked to be sure he had access to good medical care. He also made sure no one would be encumbered with his debts once he died. Then, Tissot says, he splurged, determined to enjoy himself in the time he had left.

That was in 1992. Today, Tissot is healthy and employed as a financial planner. But it took him years to repay his debts.

Now, Tissot advises clients who have been diagnosed with a serious illness to resist the temptation to embark on a spending spree. Thanks to medical advances, people are living for years with illnesses once considered terminal. But treatments are expensive, and insurance rarely covers all the costs. Even if you resist the temptation to take a world cruise, a serious illness could leave you mired in debt.

You can reduce the strain on finances by performing some fiscal triage early on. Here are some steps to take if you find out you have a serious illness:

Review your insurance.

If you have company-provided health insurance, go over your benefits. That way, you'll begin to grasp the costs that your insurance won't cover, such as deductibles, co-pays and out-of-network charges.

If your employer provides disability insurance, make sure you understand the terms of the policy and what you must do to qualify, says Karen Schaeffer, a financial planner in Rockville, Md. Going to work every day, for example, might take your mind off your illness, but it could delay your eligibility for short-term disability insurance, Schaeffer says.

You should also find out how certain benefits, such as company-provided life insurance, would be affected if you took a leave of absence.

Save your receipts.

Set up a filing system for all your medical bills. That will make it easier to file an appeal if your insurance company denies a claim. It will also help you determine whether you can deduct some of your medical expenses.

Unreimbursed medical expenses are deductible if they exceed 7.5% of your adjusted gross income. But even then, only the expenses that exceed the 7.5% threshold are deductible. If, for example, your AGI is $60,000, the 7.5% threshold would equal $4,500. If your unreimbursed expenses totaled $5,000, you'd be eligible to deduct $500 from your taxable income. But if your unreimbursed costs totaled $4,000, none of the costs would be deductible.

The 7.5% threshold prevents most taxpayers from claiming this deduction. But if your income has declined because of your illness, and you have bills your insurance won't cover, you might qualify.

Your chances will improve if you keep good records of all deductible expenses. Along with unreimbursed medical costs, you can deduct transportation to your doctor's office, home health care and medically necessary home improvements, such as a wheelchair ramp, says Cynthia Jeanguenat, an enrolled agent in Virginia Beach.

Identify sources of funds.

Ideally, you should have an emergency savings account to cover out-of-pocket costs. Most Americans don't. Twenty-two percent of Americans have no money in a savings account to cover serious illness, and 21% have less than $1,000, according to a survey by MetLife, an insurance company. Many people use their credit cards to pay medical bills, but the interest rate on most cards exceeds 15%. Less costly sources of funds include:

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