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by Sharif Muhammad
July 16, 2020
by Sharif Muhammad
July 16, 2020
As the COVID-19 virus raged through the northeast US in March, I received numerous calls from concerned clients pleading for information and guidance. Questions like, "Should I get out of the market?", "Which bills should I prioritize?" and "Should I pay the rent/mortgage?"
As we discussed these and other issues, I realized that we were dealing with times unseen by many of my clients. Sure, we have seen market crashes and we have experienced our share of crises, including 9/11, Hurricane Sandy, etc., but a health pandemic, coupled with social distancing and a shutdown of the economy, was new territory.
Through this experience came changes to general principles of financial planning, with one clear exception — I will continue, always, to make recommendations and assist in actions that are in the best interests of my clients. Here are some of the ways my planning advice has changed through the course of COVID-19 pandemic.
I know that the typical principles of financial planning call for a family to save at least three to six months of necessary living expenses (housing, food, medical, childcare, transportation, etc.). The reality, sadly, is that the average American family has a tough time coming up with $400 in a pinch.
So, when planning with a diverse spectrum of households, the path to establishing an emergency fund can take different forms. Some may be able to get it done, others may be a work in progress, and lastly, you have those who struggle to establish a fund and are literally "hoping and praying for the best, but not prepared for the worst."
In the context of COVID-19, however, keeping cash and staying liquid is the name of the game. If you have an emergency plan, great. If not, make draconian decisions regarding your spending and only spend funds on the most basic of necessities, such as food and health-related supplies, including face masks, hand sanitizer, and antiviral cleaning products.
My advice also included proactively contacting landlords, mortgage companies, student loan servicers, automobile financing companies, credit card companies, and other service providers to request deferments on payments and/or waivers of late payment fees/penalties in the wake of COVID-19.
Also, I recommended immediately suspending payments on non-essential services, such as web services, auto-delivery services of luxury items, and signing up for delivery of essential items like water and food.
As I worked with clients to get their cash flow fortified, I then asked to look at their insurance coverage. Specifically, health insurance (including health-related tax-qualified accounts like Flexible Spending Accounts or Health Savings Accounts), short-term and long-term disability, and ancillary coverages such as hospitalization indemnity and critical care policies.
Health insurance: We made sure that clients clearly understood what was covered and what wasn't (or required precertification). We also identified the applicable deductibles, co-pay percentage amounts, and max out-of-pocket amounts required in the event the client or loved one was hospitalized due to COVID-19.
FSAs and HSAs: Flexible Spending Accounts for healthcare (FSAs) are tax-qualified employee benefit plans that allow employees to make pre-tax contributions to an account that is used for qualified health expenditures, including office visit co-pays and out-of-pocket costs for prescription drugs.
Health Savings Accounts (HSAs) function just like FSAs, with the exception that they are only made available to individuals and families enrolled in a High-Deductible Health Plan; the funds in such an account are allowed to roll over and grow from year to year (FSAs have a "use it or lose it" provision, where the enrollee must spend most of the funds on an annual basis). Knowing what's in these accounts is important in planning for potential medical expenditures or funds needed to plug health insurance coverage gaps.
Short- and long-term disability insurance: Evaluating short-term disability is key under a COVID scenario, as we want to be sure that we understand what is considered a trigger event for a claim (when the doctor diagnoses you with COVID-19), your waiting period for short-term disability to kick in, the amount of the disability coverage, and for how long it lasts.
Ancillary coverages: Certain employees who are affiliated with unions or similar organizations are oftentimes offered "ancillary insurance" to supplement their existing benefits. These coverages may include hospital indemnity plans, which pay a benefit (per night, lump sum, etc.) to the insured in the event they are ever hospitalized.
In addition, critical care coverage pays a lump-sum amount if a certain condition, such as a stroke, blood clot, or other complications were to occur. Having these coverages in place can be very helpful with paying out-of-pocket costs in the event of an unexpectedly long hospital stay associated with COVID-19.
Lastly, we discussed whether, in the event of the client or spouse/partner becoming infected with COVID-19, were all estate and non-probate contracts (for example, life insurance) in good order.
Namely, were the applicable advanced directives, durable power of attorney forms, living wills, and medical proxies identified via documentation? Is there a will? Are there "Payable Upon Death" or "Transfer Upon Death" instructions in place for the bank and brokerage accounts, respectively? Do all life, disability, and retirement accounts have the right beneficiaries named and the information on such forms accurate and current?
Having the proper plans in place will not only help the families deal with affairs while one is incapacitated but also ensure that no unnecessary costs or errors are made in dividing assets if death were to unfortunately occur.
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