Case Study 9: Personal Finance Course

Personal Finance Course, 11:373:353 (01)

Department of Agricultural, Food, and Resource Economics

Personal Finance Case #9

Dale and Sally Gab, 48 and 47, are having a difficult year financially. Dale was diagnosed with cancer and spent most of last year in treatment. While he received paid sick leave from his "day job," the Gab's income decreased by almost $10,000 because Dale was too tired to operate his sideline Web site development business. Worse yet, the Gabs were responsible for about $15,000 of medical bills that were not covered by insurance. The result: a $25,000 hit to the family's cash flow.

"We thought we had good health insurance," notes Dale, who pays almost $2,000 annually toward the cost of traditional health coverage through his employer. The insurance covers Dale and Sally and their 8-year old son, Chad. When the Gabs read the fine print, however, they found that they were responsible for 20% of the cost of radiation and chemotherapy. Several expensive diagnostic tests were also not fully reimbursed. Had they been in an HMO or PPO through Dale's employer, the total cost of these services would have been covered if they used participating plan doctors. The payroll deduction for HMOs and PPOs is also less than the premium for traditional coverage.

The Gabs are wondering whether they should switch to a managed care plan in case Dale needs additional cancer treatments in the future. "We don't like the idea of owing 20% of an unknown number," Sally explains. To pay last year's medical bills, the Gabs withdrew $15,000 from savings. They charged the medical bills to their GM credit card to get dollars toward a new car, but paid the bill in full with money from the CD that was earmarked for Chad's college expenses. They always try not to revolve a balance on their credit cards.

Another drain on the Gab's finances was the so-called "secondary costs" of Dale's disease. They included over fifty trips to the hospital for treatment and increased telephone bills to call doctors and family members. Dale recently got a new cell phone plan with more minutes so that he could make health-related calls during the day from work without having to use an expensive telephone calling card.

Together, Dale and Sally earned $84,000 last year. Dale earned $38,000 and Sally, $46,000. Of their $7,000 monthly gross income, they estimate that household expenses total $3,500. Dale and Sally also contribute 10% of their respective salaries ($8,400 total) to tax-deferred employer retirement savings plans, plus an additional $2,000 apiece to Roth IRAs. Sally's employer also provides a defined benefit pension to which she contributes 7% of her salary. Dale hopes to resume his sideline business this year and charge $75 an hour to design Web pages.

The Gab's net worth is $298,400. Assets include $1,000 in checking and savings, $20,000 in CDs (set aside for Chad's college expenses), $150,000 in 401(k)s, $42,000 in traditional and Roth IRAs, two cars worth $15,000, a $180,000 house, and $5,000 of personal property. Their debts total $114,600 and include a $15,000 home equity loan, $4,600 on car loans, and a $95,000 mortgage.

Dale's bout with cancer also has the Gabs concerned about life and disability insurance. Dale and Sally each have $150,000 term life insurance policies. In addition, Dale's job provides coverage equal to three times his salary ($114,000). Neither spouse has disability coverage to provide income if they were unable to work. Dale, however, has 180 accumulated "sick days."

The Gabs have recently been talking seriously about retirement. They had originally planned to work until age 65 but, with Dale's health problems, are now considering age 55 in case his life expectancy is reduced. He would then step up his Web site business to replace part of his earnings. The Gabs have never calculated what they to save, nor have they prepared wills or any other estate planning documents.