Planning for the future: Unravelling the confusion of long-term care solutions

Geoff King was, until March 2003, at Norwich Union where he specialised in long-term care planning. He has a longstanding interest in the development of cohesive financial-services solutions to offset the worry of long-term care costs. Here, he considers the current debacle in the sector, which seems more confusing than smoke signals sent into a windy sky during a hail storm at midnight.

Being one of the older members of staff and also the resident long-term care specialist, I suffer the butt of dementia jokes around the office. But, even without suffering from dementia, I am still somewhat confused by the conflicting views and actions of insurance companies in relation to the long-term care market.

According to ABI annual returns, at the end of 2002 there were 44,442 long-term care policies in force. At first glance, this figure may look rather high. However, census data shows that in 2001, there were rather more than seven million people aged from 55 to 70 in the UK; since this is the target market, sales figures look rather low at 0.6 per cent. Of the total number of policies in force, there were 64 per cent pre-funded, insurance-based policies, 29 per cent investment-based, pre-funded policies and seven per cent immediate care plans (see box below for further details).

Pre-funded, insurance-based plans are designed to pay future care costs. They do not rely on investment returns to provide a future benefit; they are funded by regular premiums or a single premium. Provided premiums are maintained, at claim, the selected benefit amount is guaranteed;
Pre-funded, investment-based plans, long-term care bonds (no longer available) were also designed to pay future care costs. Unfortunately, they rely on investment returns. If the pre-selected growth rate is not maintained, the outcome may result, at claim, in a lower benefit payable than required or lower return of capital. All investment-linked plans need to be reviewed regularly;
Immediate care plans are an impaired life annuity used to provide immediate care fees for someone about to go into care or already in care. The underwriting determines the individual's life expectancy and for a given premium, an income is guaranteed throughout life. Currently, this is payable free of income tax if paid directly to a care provider.

Plans withdrawn and introduced

Over the past five years, immediate-care-plans sales have more than trippled, yet BUPA withdrew its immediate care plan on 1 December 2003 to concentrate on its pre-funded plans;
During the same time period pre-funded-plan sales have remained at best level or even declined, depending on which report you read, but this does not deter Pension Annuity Friendly Society (PAFS) from launching a new pre-funded contract, be it with a twist from the norm;
It gets more confusing. During the past few months we have seen two of the main players walk off the field with their pre-funded plans: PPP Lifetime Care, part of the AXA group; and Norwich Union, which had already withdrawn the long-term care bond from their product portfolio.

Why have some plans been withdrawn?

The two reasons given for them withdrawing their plans are conflicting:

Simply, poor sales equates to no profit. As with all big companies the focus is on the bottom line now, rather than what it may be in the future;
The other reason is down to reinsurance. They say reinsurers are jittery about future claims and are not prepared to offer cover without substantial increases in premiums.

Personally, I would go with the poor-sales reason. Because sales are already stagnant, an increase in premiums would probably see plans sales reduce. This being the case, providers are not prepared to maintain systems and administration for a low or nil-profit contract.

First in first out?

The big surprise is Norwich Union, which was continually winning industry awards for being the best provider of long-term care products and selling more plans than any other company through the independent-financial-advisor (IFA) channel. This was probably due to their link with Age Concern Financial Partnership, which spent a lot of time and energy promoting the plans, the need for planning for care and attempting to train IFAs in aspects related to long-term care sales.

Now both Norwich Union and PPP Lifetime Care are to focus on immediate care plans. This is probably a reflection of increased sales of this type of policy. Other providers in this market are PAFS and GE Life. Immediate care plans can provide an ideal funding solution for someone already in or about to go into care.

So who is left in the pre-funded market?

We have PAFS, BUPA, Scottish Widows, Skandia and Universal Provident.

Scottish Widows and BUPA may have an advantage because they are not totally reliant on the IFA channel to sell their product; BUPA also has its direct sales team and Scottish Widows has its advisers at Lloyds TSB. These outlets may provide them with enough sales to maintain a profit, therefore enabling them to continue providing pre-funded plans.

That leaves Skandia and Universal Provident. Skandia has not actively marketed its plan. We may now possibly see a change in its marketing strategy.

Universal Provident’s plan is a totally different concept. It has no underwriting, is based on a two-year monotorium and reviewable premium.

Problems with pre-funding long-term care

Let us now try to determine why the general public are not prepared to make provision in the event of needing care in the future:

In October 2001, the government announced it would only pay towards nursing-care costs (where a registered nurse provides nursing care or supervises non-registered nurses or care assistants) of someone’s nursing-home fees. This was against the recommendations of the Royal Commission;
At last there was clarification that anyone having to pay their own care fees in England (Wales and Scotland are funded differently) would have to pay for their own accommodation and associated services in a care home. It is worth noting the cost of this can be well in excess of £20,000, depending on where you live. According to Laing & Buisson’s survey issued in 20031, they reported the average cost of a private care home to be £23,660 per year.

Now that the government has made the public aware of the situation, why have we not seen increasing sales of pre-funded plans? Is the general public suffering with gerontophobia or are people not aware of the situation and need educating? One has to assume the latter while accepting that even with growing numbers needing more expensive care, there will naturally be an element of “It won’t happen to me…” That creates some of the inertia for sure.

How are people educated?

One way could be through a solicitor, but people often only visit a solicitor for a specific reason, maybe to arrange a will or enduring power of attorney. However, during this type of meeting long-term care issues may be discussed and addressed.

Perhaps a more ideal way is through a financial adviser because it comes under his or her remit of financial planning as part of the standard financial questionnaire. This is completed with the client and contains a question related to long-term care.

It is at this point that the education should begin, but instead, there are problems. For example, due to a lack of confidence, the question, ‘Would you like to make provision in the event of requiring care in the future?’ is not always asked, or asked in a way that the client just says ‘no’.

Unfortunately, many IFA’s do not have the necessary specialised knowledge of legislation or state benefits, nor are they aware of the financial and emotional implications of failing to plan for the possibility of needing care.

It amazes me how much time an IFA will spend on inheritance-tax planning (IHT), to save the client 40 per cent of their estate above the nil-rate band. Regrettably, they fail to explain or suggest ways of preventing large parts and, in some cases, all of their estate being used to pay care fees in the future. Chris Ellicott, technical support manager at Age Concern Financial Partnership, recently said: “IFAs spend a large proportion of their time enhancing the wealth of their clients, and providing them with the wherewithal to enjoy their retirement. IFAs also need to ensure that their client’s plans are not undermined by the need to finance long-term care of the standard that clients would want to choose if care should be needed in later life. That sort of value-added planning is what their clients expect of a professional adviser.”

Some clients may not want or be able to pre-fund care fees, because of cost, health reasons or just attitude. Even so, these clients still deserve to know how their own personal financial circumstances may affect the way they will have to fund care fees, if care is needed in the future.

What about future education?

Realistic education seems to me to be the solution, not only for the general public, but also for the ‘teachers’. Maybe October 2004 will see a change as the FSA introduces regulation for all long-term care plans. New advisers will have to sit a specific exam to be able to give advice.

Where do we go from here? Well clearly, IFAs must now begin to recognise the need to acquire more knowledge on all aspects of long-term care planning. Among other things, they must be able to provide guidance on the full procedure when needing care, including deprivation of assets, state benefits, wills and enduring powers of attorney. It is also essential to have a good understanding of CRAG (Charging for Residential Accommodation Guide), the local authorities bible. After all, there is more to long-term care than just ‘selling plans’. The reality is that only by acquiring a high level of knowledge will they be in a position to provide the best, most complete advice to their clients. Only then can an IFA expect to be referred to by professional connections, who will want to know that their client is being dealt with by someone who is fully competent in this specialised area.

To conclude, the responsibility for the future of the long-term care market lies not only in the hands of the providers, but also in the hands of the IFA. Only by gaining knowledge and expertise will the general public be able to receive the quality advice needed for this complex but gratifying area of financial planning. I hope the day never arrives when we cannot make provision for a client’s care because there are no plans available (let’s face it, we may need one ourselves). On completing this article, someone asked: “Has the confusion now cleared?” I replied: “What confusion?” r

Reference:

Laing & Buisson Care of Elderly People 2003 market survey

Geoff King is an IFA who specialises in long-term care. He founded Care4u, a care-fees planning service in May 2003, which forms part of Westcourt Financial Services Ltd, Independent Financial Advisors. He can be contacted by e-mail at gk@westcourt4advice.com