Medical challenges happen all the time. You try to avoid them as best you can, but it’s when you’re financially unprepared for them with a medical emergency fund, they can have the most devastating effects.
One of the difficulties my wife and I faced was getting caught off guard when our little girl Harper spent nine days in the NICU shortly after birth. The threat alone on her little life was about all Lindsey and I could handle at that time.
Harper made a full recovery, thank God, but we received another devastating threat, this time on our finances.
Despite the fact our family was covered under a high quality medical plan, our out-of-pocket expenses totaled more than 6 months of income after nine days in the hospital.
I should be clear: that was not the total bill, it was only the portion our medical insurance did not cover and thus became our responsibility.
All the emergency funds we had saved up over the past few years we depleted almost instantly.
As scary as it was seeing our newborn daughter hooked up to tubes and wires, we were at least somewhat mentally prepared for the fact that medical emergencies are an unfortunate part of life.
What we weren’t prepared for was how a medical emergency so quickly became a financial disaster, even will full medical coverage.
What we know now, and what I’ll share with you today, is that by properly allocating a small fraction of our excess income each month, our hard-earned savings would have been protected and our savings account wouldn’t have been depleted.
Everyone Needs An Emergency Fund
Having an emergency fund is basically a safety net that protects your lifestyle in the event you don’t have a reliable income stream for a period of time, or in the event you incur a sudden unexpected large expense, such as a medical emergency.
I’m sure you know someone, maybe even yourself, who has gone through a significant job or career change. In this scenario, it is comforting to know you have financial breathing room in case you need it.
A general rule of thumb is to save six months worth of living expenses in the event you lose income for a short period of time. Simply calculate your “burn rate,” which is your total out-of-pocket costs for living expenses over a six month period.
But there are several major hurdles in the process of building an emergency fund that you may not be aware of, so let’s explore a few so you’ll know how to identify and avoid them.
Hurdle #1: Saving Money is Hard
Here’s the first hurdle, one that no one likes to talk about: Saving is hard!
Doing what it takes to create an emergency fund takes a great deal of patience and discipline.
First, finding out how much disposable income you can generate is difficult all on its own. Lindsey and I tracked every penny we spent for one month. Every penny. In doing so we we found that there are areas we spend money on (well, mainly areas I like to spend money on) that we considered unnecessary habits.
Personally, I was in the habit of buying far more fancy lattes than was good for me, and I was eating out far more often than I should simply because it was easier than eating at home.
In the end, this amounted to a sizable sum of money I was misallocating every month. It was impulse buying. By tracking this, I saw what my habits were, and then how to change them to better align with our priorities.
While this is a great exercise for anyone to do in any area of life, it is also revealing, and thus difficult. Habits are hard change.
Or, you may find out that there simply isn’t much room to build an emergency fund right now, which leaves you in an even more vulnerable place in the event of a medical emergency.
Hurdle #2: Saving Money is a Long Process
In addition to personal qualities such as patience and discipline, saving also takes time – and lots of it. Often, saving even a modest sum of money takes more time that most advisors like to admit, and more time than you may have to properly protect your family.
Let’s break that concept down. Say you have an income of $6,000 per month. Now assume you have a “burn rate” of $5000 per month, representing all your basic living expenses including (but not limited to): Mortgage/rent, insurance, food, utilities, living amenities, retirement savings, etc.
In order to build an emergency of fund worth six months of living expenses, you’ll need to save $30,000.
[$5,000 of monthly expenses x 6 months = $30,000]
Now, let’s also assume you have done a detailed analysis on exactly what your spending habits are and you calculated there’s an extra $500 per month to “work with”. From there, you’ll take $100 of that extra and make it “play money,” and you’ll take the remaining $400 and dedicate it to building your emergency fund.
Let’s review the facts: You make $6,000 per month and have allocated $400 per month of those earnings to your emergency fund, and you need to save about $30,000 total.
So how long will it take you save up your emergency fund? Starting from scratch, assuming no interest earned, it would take you… six years and three months!
[$30,000 emergency fund / $400 per month savings = 75 months / 12 month per year = 6.25 years]
Yikes! Six years is a long time, and in the interim your family is not fully protected.
Hurdle #3: Shooting A Beebee At A Freight Train
Here’s the last problem, and perhaps the most important: despite the fact that it could take the average person over six years to build a modest savings account, a medical emergency can wipe it out almost instantly.
In my case, it only took nine days.
The biggest mistake people make is they assume an emergency won’t cost more than what they need to cover their basic living expenses. This couldn’t be more wrong; I lived it.
Bottom line, if you have the misfortune of experiencing a significant medical event — such as an accident or a cancer diagnosis — you should expect your expenses to possibly increase by up to $20,000 per month, on top of your current living expenses.
Jump All Three Hurdles At Once
While emergency funds are important to have there’s a better way to protect you and your family from the effects of a major medical event.
What you need is leverage. Not the risky kind of Wall Street leverage you hear about on the news, but the kind of leverage you get with the right type of insurance policy, and without the painstaking and/or time-consuming saving process.
A simple insurance policy, specifically a supplemental insurance policy, provides all the benefits an emergency fund can provide in the event you get sick or hurt, yet avoids the three major emergency fund hurdles of personal disciple, time, and relative size.
Supplemental insurance will have you covered, instantly, and for around 1/20th the cost.
Supplemental insurance is a common standardized insurance policy that pays large sums of cash directly to you over and on top of your medical and disability insurance. It “supplements” your medical insurance to cover the indirect out-of-pocket costs your medical insurance doesn’t cover.
Supplemental insurance can cover expenses such as:
- Living Expenses
- Co-pays and deductibles
Supplemental insurance pays up to $30,000/month per policy. If you decided to invest in all four policy types, that sum increases to $120,000/month total. That’s real protection.
Obviously that is a tremendous amount of money, but a major medical event can be like a tidal wave of expenses. In my case, it took nine days to wipe out my savings account. Instead, with supplemental insurance to cover the expenses medical insurance doesn’t, your savings will be protected.
But, wait! There’s more! This useless hunk of merchandise can be yours for only 96 easy payments of $19.95 (plus shipping + handling)!
Ha. Just kidding. But seriously, without sounding like an infomercial, there’s more…
Here’s my favorite part of this type of insurance: the premiums are 100% refundable.
What would you say if your insurance provider told you they would give you all your money back if you didn’t have any claims? And beyond that, if there were claims less than what you paid into the policy they would give you the difference back?
What if the only time you would not get all your money back is if you received more money from the insurance provider than what you paid into the policies?
Crazy, right? Yet that’s exactly what LIG’s supplemental provider offers. Now it’s a win win.
If something happens and you need to use it, you have a tremendous amount of resources at your disposal. But if you never need your insurance (and get incredibly lucky) you receive every penny back.
Most people don’t buy insurance assuming they will have to use it, so it often feels like a wasted expense.
With the right kind of Supplemental insurance, in the event you don’t use it, you can still be assured that you’re making a no-brainer financial investment: you will get all your money back if you never have to exercise the policy.
How Do I Know If I Qualify?
In case you hadn’t already guessed, Legion Insurance Group specializes in this kind of Supplemental Insurance. In fact, we have several proprietary free resources you can take advantage of if you think Supplemental insurance might fill a need for your family.
Specifically, you can download our free Product Catalog by signing up below (under “What Is Refundable Insurance?”), or you can get a free quote for more information.