Health Crisis Would Shatter Finances of Most Middle-Income Americans

Most would turn to savings, but they don’t have enough

About 90% of middle-income Americans don’t feel prepared to handle the financial cost of a critical illness diagnosis, according to a survey released Tuesday.

The study, Middle-Income America’s Perspectives on Critical Illness and Financial Security, from the Washington National Institute for Wellness Solutions (IWS), found just 11% of respondents have enough money saved to cover family emergencies and health costs from a critical illness.

Most said they would turn to savings to cover costs their insurance wouldn’t, but 75% have less than $20,000 in savings. A quarter have no savings at all.

The survey found those who are confident they have saved enough may be underestimating how much they’ll need. “Middle-income Americans frequently omit associated costs—like post-treatment wellness visits, nonmedical bills, professional caregiving, lost income from missed work, travel to and from treatment and other expenses—when they consider the total costs of critical illnesses,” according to the report.

Americans understand it’s expensive to be sick, though. Nearly half of respondents said they would probably never recover financially from an Alzheimer’s or dementia diagnosis, and 38% said the same of a cancer diagnosis.

“What we try to do [as an insurance company], is provide products that meet a wide range of needs for individuals,” Barbara Stewart, president of Washington National, told AdvisorOne on Wednesday. “At the end of the day, it’s the psychographics related to people having their risk characteristics and what they feel is adequate to cover, and balancing that with their savings and support mechanisms, like family, friends, etc.”

Still, 58% of respondents haven’t spoken with advisors, or even loved ones, about potential caregiving options, and 60% haven’t discussed financial planning, according to the report. In fact, when it comes to getting information about how to pay for a serious illness, financial institutions and advisors rate pretty low. Nearly 30% of respondents said their insurance company would be their go-to source for information, followed by the hospital (13%), health care provider (12%) and their family and friends (11%). Just 9% of respondents said a financial advisor or insurance agent would be their primary source of financial information.

“First and foremost, people are going to go back to their medical plan insurance company to figure out what coverage they have, and consequently what financial protection they have, as well as learn about the gaps that exist,” Stewart said.

Stewart stressed that it was important for advisors to “raise the question as it relates to middle-income consumers in terms of the whole area of health risk and the opportunity incidence of a critical illness and the financial gaps that’ll be caused by that.” Advisors should make sure “their conversations are not solely focused on wealth accumulation or insurance, but bring in that full financial picture that also brings in the health consideration and the fact that you need to be planning not just for [critical illness], but what happens to their retirement nest egg if it occurs at some point later in time and they still don’t have adequate financial coverage.”

Just 5% of respondents said they had purchased critical illness insurance, and most were not even aware of it, the report found. Of the 23% who have heard of such products, two-thirds haven’t purchased them because they think they’re too expensive. Almost 40% don’t think they’ll provide enough to cover their expenses.

Barbara Stewart, Washington National“The issue is there’s a misconception as it relates to options for coverage. One of those misconceptions is clearly that it’s too expensive,” Stewart (left) said. “What we try to do is position a wide range of options for folks for what they feel is the appropriate level [of coverage] and so that there are affordable coverage options at all of those considerations.”

She added, “For middle-income consumers, critical illness insurance is definitely an option. I just don’t think there are enough financial advisors who actually share the story and help raise the awareness of the issue.”

IWS found respondents were most concerned about a cancer diagnosis, followed by heart disease, stroke and Alzheimer’s. According to the Centers for Disease Control and Prevention, heart disease, cancer and stroke account for half of all deaths each year, and nearly half of adults suffer at least one chronic disease.

The report noted that those who were most concerned about cancer and heart disease worried about the cost of treatment, in addition to the disease itself, while those who said they were most concerned about stroke and dementia were more likely to worry about their independence and quality of life following a diagnosis.

Critical illness is a long-term concern for those who said they were worried about it, the report found. Nearly half of respondents said there was a possibility they could be diagnosed with a serious disease in the next 20 years, while 22% said it could happen in three years. Those who feel most vulnerable were more likely to be uninsured or unemployed, in poor or fair health, and had lower income.

“The biggest concern is related to paying bills as it relates to today. We know there are gaps in health coverage and there will be incremental expenses, including non-medical like caregiving expenses and travel and the like. The other component of that is to help as it relates to protecting retirement savings.”

Boomers specifically feel most vulnerable to critical illness, Stewart noted, and are more likely to have a family member or friend who has experienced a major illness, “so it resonates more to them as it relates to risk.”

“The study was about wellness as well as critical illness,” Stewart said. “Always practice healthy living. No one is invincible.”

Washington National is a subsidiary of CNO Financial Group. The Institute for Wellness Solutions is its research and consumers education program. The survey polled 1,001 Americans between ages 30 and 66 with an annual household income of between $35,000 and $99,999 for the report.

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Read Top 10 Cheapest States for Long-Term Care Costs: 2013 on AdvisorOne.

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