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:

•A home-equity line of credit. If your prognosis is good and you expect to be back to work in a few weeks, taking out a home-equity loan might make sense. But if you're facing a long and uncertain battle, borrowing against your home is a bad idea, says Chris Cooper, a financial planner in Toledo, Ohio.

Unless you're single with no dependents, "that house may be needed for your survivors," he says. "You don't want to leave them with that debt."

You may not even have the option. The subprime mortgage collapse led to tighter credit standards. As a result, many homeowners now face a harder time getting a home-equity loan or line of credit.

•Withdrawals from your retirement savings. If you have a Roth individual retirement account, you can withdraw the amount of your original contributions at any time, for any reason, without paying taxes or penalties.

Ordinarily, withdrawing earnings from your Roth before age 591/2 triggers a 10% early-withdrawal penalty and taxes on the earnings. But the penalty is waived if you've had the Roth for at least five years and you use the money to pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, Jeanguenat notes. If you're disabled, you won't pay taxes or penalties on your Roth earnings.

If you withdraw money from a traditional IRA, the usual penalty is waived if you're disabled or you use the money to pay medical expenses that exceed 7.5% of your adjusted gross income. You'll still, however, owe income tax on the withdrawal.

•Family loans. Schaeffer recommends asking relatives for a fixed-rate loan to help with medical costs. You can probably get a better interest rate than you'd get from a credit card issuer, and you won't risk losing your home.

If family and friends can't provide financial assistance, there are other ways they can help. They can provide meals, mow the lawn, clean the house and take you to the doctor, so you don't have to pay someone else to perform those services.

Hal Chapel of Sudbury, Mass., saw what a difference friends and family can make after a close friend was diagnosed with ovarian cancer, and Chapel's wife found out she had multiple sclerosis. To help volunteers coordinate their efforts, he created a website,

While reaching out to family and friends is sometimes difficult, Chapel says, "It's a sign of strength, not weakness, to ask for help."

Put your affairs in order.

Even when there's every reason to expect you'll live for years, you should prepare for the worst. That means making sure you have an estate plan in place, including a will and a legal guardian for your children.

You should also draw up documents designating a power of attorney for finances and a power of attorney for health care. These documents give a trusted relative or friend the power to manage finances and make health decisions if you become incapacitated. Without them, your family could be forced to seek a court order declaring you incompetent — an expensive and often emotionally wrenching process.

Make sure the power of attorney for finances is specific, Cooper says. The person who has power of attorney, known as the attorney in fact, should have the ability to sign tax returns on your behalf and manage your retirement savings plans.

Most married people give power of attorney for health care and finances to their spouses, but they should have a secondary agent in case the spouse also becomes incapacitated, Cooper says. He cautions, though, that it's a bad idea to name more than one person as your primary agent. That's because co-attorneys in fact may disagree about your care. "I've seen this done, and it doesn't work," Cooper says. "There should be only one captain on the bridge."