A June 2009 article in the American Journal of Medicine reported that medical bills are behind more than 60 percent of U.S. personal bankruptcies, adding that more than 75 percent of these bankrupt families had health insurance but still were overwhelmed by their medical debts.

The article, based on research from Harvard Law School, Harvard Medical School and Ohio University, underscores how a single health crisis can financially destroy both individuals and families. It is information that underscores the need for adequate planning ahead of any health crisis, particularly when known risk factors exist in a family. A financial expert such as a CERTIFIED FINANCIAL PLANNER™ professional can help individuals determine if their insurance and savings options are adequate to handle the possibility of any future health crisis.

If you have time to prepare, most financial planners will advise:

• Creation of an adequate emergency fund to cover several months (usually a minimum of three months and, even better, up to a year) of family expenses if a patient can’t work during their treatment;
• Purchase of separate disability insurance to pay everyday expenses since company-bought disability coverage will likely be limited – the benefits on any individual policy need to be coordinated with the group policy;
• Creation of health care advance directives, health care powers of attorney and financial powers of attorney, health care proxies (each state has a “preferred” document that is accepted; clients need to execute the form for their state of residence) and DNR forms among the examples.
• Building lists of critical phone numbers, major assets and where information on each can be found on investment accounts and other key information in case the person is incapacitated;
• Communicate funeral plans to family members in writing so that wishes can be implemented in the event of death. Even better, complete a personal death awareness document that covers both the practical aspects of death and the interior emotional aspects of death.

But if you’re suddenly faced with a frightening, expensive and potentially life-threatening diagnosis without such preparation, here are some basic steps to take:

Start by realizing it’s not all about the money: If you or someone you love is sick, obtain the best care possible, not what your bank account and health insurance can buy.  A CFP^® professional with experience in dealing with healthcare issues can help you assess your financial situation against various goals for retirement, your expenses, your children’s education and other matters.

Grill the patient’s insurance agent or HR person: If you or family members have bought health insurance through an agent or your employer, insist that they explain exactly what the plan covers and where your deductibles do and don’t apply. Generally, a serious illness will quickly use up the deductible (this is where your emergency fund is important). Pay attention to how much the insurance will pay and how much you’ll pay out of pocket once the deductible is exhausted.

Check on experimental treatment and see how it will affect coverage: If the diagnosis is cancer or some other potentially life-threatening illness, in addition to tried and true treatments, research medical centers offering clinical trials. And, keep in mind that some insurance plans might look askance at certain treatments that could potentially lead to other health issues. Err toward caution in these matters, but if the insurer approves, see if such experimental treatment can get you a break on costs.

Get those directives in order: A health care advance directive is a formal, preferably notarized instruction sheet for doctors to follow in case you or family members are incapacitated. The most commonly known health care directive is a do-not-resuscitate (DNR) order. A health care power of attorney designates a particular individual — a spouse, a friend, an adult child — to carry out your medical wishes if you are incapacitated. Meanwhile, financial powers of attorney designate an individual to handle financial affairs if the sick or deceased are single or did not designate joint tenants for certain assets. Again, each state follows a particular set of documents.

If there isn’t a will or a complete estate plan, make one: A will doesn’t have to be enormously detailed to relieve problems for survivors, but it can create enormous problems if it doesn’t exist. If there is no executed will, the estate is intestate, which means that property is distributed by state laws. Yet it makes even more sense to review all of a patient’s assets to determine if more detailed directives are necessary and most important, to make sure beneficiaries on insurance, retirement accounts and other investments are up to date.

Consider whether you can make monetary support a gift: It’s good to get tax and financial advice on making a one-time gift to support the patient. Would the potential loss of money injure you, and worse, will it injure the relationship? If you don’t think you will be repaid would you be willing to consider it a gift?

Ask for generics and samples: Many physicians are willing to recommend a generic substitute or at least supply you with a few samples of the drug they’re already prescribing. While doctors can’t get away with passing sample drugs to all their patients, always ask. As long as they are prescribing the medication, samples with the proper dosage can provide cost savings to patients.

Begin negotiations before there’s a financial problem: The best time to speak with hospital bean counters isn’t when you’re behind on your payments. Once a diagnosis is made, either you or someone you designate as your agent needs to contact the hospital business office to check on payment schedules and possible discount plans if you are uninsured or fear your insurance may not cover a significant portion of costs. Any creditor appreciates a customer who’s willing to come to the table first.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP , a local member of FPA.

We recently observed the first anniversary of the most shocking and terrifying week in most of our financial lives: the economic cataclysm of September 15–19, 2008.

Even the greatest one-day stock market crash in history on October 19, 1987 did not shake us the way this Hell Week did, inasmuch as it was almost entirely contained in the equity market: the economy, the banking system, and the world at large, aided by a tsunami of liquidity from the Federal Reserve, rolled merrily along. The epicenter of the earthquake—at the corner of Broad and Wall Streets—turned out to be the whole earthquake.

And the terrorist atrocities of September 11, 2001, even as they forced us to confront a whole new global geopolitics—and our position in the world as the target of an unfathomable crypto-religious hatred—had, after the initial shock, no lasting economic effect.

But Hell Week 2008 shook the global financial system to its foundations. The previous week, the federal government had taken over the two government-sponsored mortgage enterprises Fannie Mae and Freddie Mac as they teetered on the edge of the abyss. On Monday, September 15, Lehman Brothers failed. It was (and remains) the largest corporate bankruptcy in American history, but on that day, this datum seemed almost beside the point. The issue was how much damage Lehman’s failure would do to financial institutions all over the world which were exposed to Lehman through complex derivatives—in the jargon, Lehman’s counterparty risk. No one seemed to be able to get a handle on this, and that uncertainty struck terror in the heart of the financial system. That same day, Merrill Lynch—one of the last great, independent investment banking and brokerage houses—was forced to merge with Bank of America in order to stave off its own imminent failure.

The next day, the government had to bail out one of the world’s largest insurance companies, AIG, whose counterparty risk threatened to be even greater than Lehman’s. And indeed, on that day—having written off its exposure to Lehman—the Reserve Primary Fund, a $62 billion money market fund, “broke the buck.” That is, its net asset value fell below a dollar a share. Suddenly, no one knew what three trillion dollars of nominal money market fund assets were really worth, and panic liquidation set in on a hitherto unimaginable scale.

And so the week went on, with the government desperately injecting unprecedented amounts of liquidity into the financial system, in an attempt to prevent the credit markets from going into anaphylactic shock. All in vain: by week’s end, it was becoming clear that the global market for credit was shutting down. And as it did, the world economy—to which credit functions as oxygen does to the human body—would fall off a cliff. Never in our lifetimes has economic activity in our country fallen so far so fast as it did in the fourth quarter of 2008 and the early months of 2009. Hell Week had been the detonator of a global thermonuclear financial implosion.

It is a minor irony of Hell Week that the stock market, as measured by the S&P 500, closed that Friday at its high for the week: 1255. The rally, such as it was, was propelled by the hope against hope that the government’s apparent willingness to intervene without limit—to do, in Fed Chairman Bernanke’s phrase, “whatever it takes”—would stem the tide. Reality would overtake us soon enough: driven relentlessly lower by massive home foreclosures, a cascade of bank failures, the bankruptcy of two of Detroit’s Big Three and soaring unemployment, the equity market would in the next six months decline by nearly half from its Hell Week close, to 676 on March 9. (And this, of course, was the continuation of an already significant bear market which had begun when the market topped out at 1565 in October 2007.)

It was the nearest thing we had ever seen to the end of the world. Investors fled equities in a wave of panic which has few if any antecedents in our lifetimes. As 2009 began, deposits in passbook savings accounts and money market funds (the latter now guaranteed, in desperation, by the government) were greater than the market capitalization of the entire U.S. stock market, as denominated in the Wilshire 5000 stock index. Think of it, dear reader: for months on end—on any given day—the holders of cash equivalents earning less than one percent per year could have reached out and bought the American stock market in its entirety by nightfall. Yet they did not. And indeed, why would they? It was the end of the world. Everyone said so.

As I write, a year almost to the day since the end of Hell Week, the S&P 500 stands at 1070—about fifteen percent below its close on the Friday, and less than six percent below the week’s low at 1134.

How can that be? Why, Hell Week was the beginning of the end of the world. Look what unfolded over the next six months: inarguably, the onset of the end of the world. Everyone said so.

Yet six months further on—the best six months in the American stock market since 1933, if anyone’s counting—we’re within a whisker of where we were in the middle of Hell Week. And will—sooner than later, if one may hazard a pure guess—surpass those levels. This eventuality will, when and if it happens, wipe out all the market’s “losses” since the morning of Lehman’s failure. Far more to the point of this essay, it will leave everyone who panicked out of the market during and after Hell Week—and who is still out—under water. Again: how can this be? What on earth can have happened?

What happened, dear reader, is that once again, seemingly against all reason and logic, the world did not end.

A detailed recitation of all the economic phenomena which have turned importantly positive—manufacturing (up eight months in a row), retail sales, productivity, the national savings rate, household net worth (the first uptick in two years), and even housing starts—is probably not necessary here. Indeed, even the last, lingering negative economic indicator, unemployment, seems to be in the process of topping out. The major banks have begun repaying their TARP money, and are recapitalizing. Merger and acquisition activity has restarted from a dead stop. And in a final irony, the Treasury just in the last few days quietly ended its guarantee program for money market funds, stating quite correctly that it was no longer necessary. We are by no means out of the economic woods—now, all that excess liquidity has to get mopped up before inflation ignites—but (a) we’ll cross that bridge when we come to it, and (b) that’s way beyond the scope of this essay.

One wishes simply to point out, here, that the world did not end—as indeed, historically, it has always failed to end in all the crises of yesteryear—and that everyone who predicated his portfolio on the end of the world has once again, at this writing, thrown snake-eyes. This is neither economic nor market commentary. Still less is it a prediction of the economy, nor of next year’s market. It is purely an inquiry into the tragedy of panic.

Even more seductive than the siren song of a fad near its top—the Internet in 1999, real estate in 2005, oil in the spring of 2008—is the hypnotic spell of catastrophism near a bottom. This is a psychological much more than it is an economic phenomenon, since it is well documented in the literature of behavioral finance that we fear loss far more acutely than we hope for gain. The peaceful and even blissful illusion of “the safety of cash”—bringing with it surcease from the pain of watching our investments lose value every day—becomes at such times well-nigh irresistible. And to justify giving in to the lure of cash, we latch on to whatever apocalyptic theory comes most readily to hand in the mainstream media.

And invariably—at least throughout history so far—we come bitterly to regret it.

This is, finally, the lesson of Hell Week one year on: that however horrific this particular turn of the cycle was, it was just that: a turn of the cycle. But that the cycle itself had not been repealed. And that if history was any guide—and it remains the only guide we have—however much the rubber band was stretched in one direction, even so would it snap back when released.

It was not necessary to know how or when the cycle would reassert itself, and in fact no one did, because no one consistently can. (And even if a lonely voice or two had spoken up for the imminence of the cyclical turn, the cacophony of catastrophism last winter would surely have drowned them out.) It was merely necessary to maintain one’s faith that the cycle would turn. But that faith was and is much more a temperamental than an intellectual quality. And one nurtures it not by studying the economy at any given moment, but by studying history all the time.

The great documentary filmmaker Ken Burns has said, “History is medicine. It has nothing whatever to do with the past. It has everything to do with the present.”

A word to the wise: next time—and you may be sure there will be a next time—just keep taking your medicine.

© 2009 Nick Murray. All rights reserved. Used by permission.