The Bills Do Not Stop When Your Paycheck Does

A paycheck can stop for two different reasons. Most families have planned for only one of those reasons.

The one everyone plans for is death. Life insurance exists for exactly that risk, and the math is well understood. I worked through that math in How Much Life Insurance Do You Actually Need?.

The second reason is a serious illness that leaves you unable to work. Far fewer families have planned for that risk, and illness costs a household in a different way.

Why illness and death are not the same problem

When someone dies, their own costs go with them. But the debts and the family bills remain. The job of the life insurance is to replace what that person earned.

A serious illness does the opposite. The income stops and the person is still here, still eating, still needing the house warm. New costs then land on top of the lost income. Treatment, travel to appointments, help around the house, and sometimes a spouse cutting their own hours to give care.

So the shortfall is wider than the missing salary. It is the missing salary plus whatever the illness itself costs, for as long as the illness lasts.

How long the illness lasts is the real question

A broken arm is not the risk here. Neither is a few weeks off work while something heals.

The cases that damage a household are the ones that run for a year or more. That is where savings drain and a spouse's career takes the hit. It is where families start making quiet trade-offs they never planned on.

Long illnesses are not rare, either. Roughly one in four of today's 20-year-olds will be out of work for a long stretch before retirement age. The cause is a disability. That is the Social Security long-standing estimate.

What actually covers a long illness

Two kinds of coverage exist, and each covers a different part of the problem.

Living benefit riders sit on a life insurance policy. They let you draw on part of the death benefit while you are still alive. The trigger is a diagnosis of critical, chronic or terminal illness. Chronic covers cognitive decline, so Alzheimer's counts. These riders can go on both term and permanent policies. That surprises anyone who assumes a term policy only pays out on death. What varies between carriers is which diagnoses trigger the rider. It also varies how much of the death benefit you can draw. I go through those mechanics in Your Life Insurance Can Pay Out Before You Die.

Long-term care insurance is a separate policy, sized for the cost of care rather than the loss of a paycheck. It matters because care is often the part that runs for years. About 7 in 10 people turning 65 will need some form of long-term care, according to the U.S. Department of Health and Human Services. Medicare largely does not pay for that care.

Where to start

Do not start with a product. Start with a number.

Work out what your household spends in a year. Then ask how long the household could keep going. One income stops, and care costs arrive at the same time. Planning for one to three years of costs gives the family a cushion.

If your family could only cover a few months of emergency expenses, that is normal rather than a failure. Most families are in the same position. The gap gets closed in stages, not all at once.

Then check what you already have. If you have a life insurance policy, there is a fair chance it already carries a living benefit rider. Quite possibly that rider has never come up.

If someone in your circle is facing a diagnosis right now, this is worth passing along.

If you would like to look at what your own household could absorb, I am happy to walk through it with you.