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How to Survive an Insurance Elimination Period

Maintaining adequate insurance coverage is just the first step toward surviving a financial or health emergency.

Here’s why: Depending on the type of insurance you need to tap and the way your policy is structured, you may wait several months before receiving a check from the insurer. During that time, you’ll potentially need to pay medical bills, funeral expenses, living costs or other fees. So having a plan in place for making ends meet while you await an insurance settlement is part of smart financial planning.

The length and reason behind the wait will vary depending on your insurance policy. With long-term disability insurance and long-term care insurance, policyholders will typically have an “elimination period,” which can last from a one month to six months or more before coverage begins. During that time, you may need to pay for living and medical expenses, potentially without a paycheck, from your own savings or investments.

When it comes to life insurance, claims are often paid within a month or so, but you still may need to cover pricey funeral expenses and other end-of-life arrangements before that check is issued. While medical insurance payouts are often designed to be quick, you could have to dispute a billing error or haggle with your insurance company before you’re reimbursed.

Understanding how to make ends meet in stressful situations — when you’re dealing with a death, disability or a medical emergency — can be difficult. “When you’re emotionally overwrought or overwhelmed, it’s harder to make decisions,” says Dennis Nolte, certified financial planner and vice president at Seacoast Investment Services in Winter Park, Florida.

So how can you pay your bills while you wait for an insurance payout? There are a handful of strategies, each with its own benefits and consequences. Here are a few options, starting with the best option and moving toward the least beneficial.

[Read: No Savings, No Backup Plan, No Fairy Godmother: How to Handle a Financial Disaster.]

Tap an Emergency Fund

Waiting for an insurance payout — especially during the monthslong time frame you’ll likely have with long-term disability or long-term care — is the perfect time to tap an emergency fund, experts say. In fact, paying bills during this exact type of situation is why you should have an emergency fund, experts say.

Having three to six months’ worth of living expenses squirreled away should get you through even some of the longest elimination periods. Plus, tapping a liquid emergency fund won’t carry negative tax consequences and has the greatest ease of access, Nolte says.

[See: How to Build an Emergency Fund.]

Sell Stock

If you hold stock in a taxable account that you’re willing to part with, consider selling it to come up with the funds you’ll need, Nolte says. While the tax penalty will be limited to capital gains on stocks you’ve held for at least a year, Nolte says, you’ll miss out the potential earnings of leaving your money to grow.

Withdraw Retirement Savings

While it’s never ideal to tap a retirement account before you’re ready to retire, the option is there if you need it. Just keep in mind that borrowing against certain types of retirement plans carries the risk of accumulating penalties, fees, interest and tax repercussions if you don’t repay the money within a designated amount of time. Plus, you miss out on earnings you could have received had the money stayed invested.

If you need cash fast, you may be able to withdraw your contributions — but not your earnings — from a Roth IRA without paying the early withdrawal penalty. To qualify, the Roth must be at least five years old.

When you know that a lump sum payout is coming within 60 days, it can make sense to take advantage of a 60-day rollover from an IRA. “You can roll out an amount, and if you put it back in within that 60-day time period, then you won’t pay taxes or penalties,” says Melissa Sotudeh, a certified financial planner and wealth advisor at Halpern Financial in Rockville, Maryland. “You can do only one of those per year, so you have to be careful with that.”

For workers who have a 401(k), there may be an option to borrow up to 50 percent, but no more than $50,000, of the vested account balance. Borrowers must repay the sum and interest within five years. Failure to do so can trigger taxes and early withdrawal penalties. Again, this strategy works well if you’re waiting for a lump sum payout that you know will help you replace the cash quickly.

Take Proceeds From a Cash-Value Life Insurance Policy

Another place to look for emergency funds is in a permanent life insurance policy, from which you can withdraw or borrow what you’ve contributed tax-free. “You’ve already put money in — just yank it out,” Nolte says. Just note that any money you fail to repay can reduce the face value of your policy or even cause it to lapse.

[See: 7 Signs Your Romantic Partner Is Financially Unstable.]

Borrow Against Your Home

Those who need the cash can borrow against their home value through a home equity line of credit, a type of revolving credit in which your home serves as collateral. Keep in mind that tax reform has limited the instances in which you can deduct the interest paid on an home equity line of credit. Going forward, you can only claim this benefit when the loan is used to buy, build or substantially improve the home. If you’re using home equity to, for example, pay regular living costs while you await the start of your disability checks, “you won’t be able to deduct any taxes,” Sotudeh says.

Tap Credit Cards, Family and Other Resources

It’s never ideal to borrow from credit cards, take on personal loans or hit up friends and family for cash, but if you need to use these as a last resort, they may be options available to you. The situation may be more tenable if you know a payout is coming in a month or two, so you only have to float high-interest debt payments or awkward family dynamics for a few pay periods.

If debt isn’t an option, you can consider selling belongings, such as electronics, jewelry or even your car to come up with fast cash when you need it.

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How to Survive an Insurance Elimination Period originally appeared on usnews.com



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