Feature

posted 1 Apr 1996 in Volume 1 Issue 4

Planning for Long Term Care is a complex exercise.

Due to the need to ensure that a client's objectives are met fully, it is not, in my opinion, possible for a Financial Adviser to give advice in isolation.

There is a clear opportunity for IFA and solicitor to dovetail their advice for everyone's benefit. Equally, an accountant's input is important to ensure the whole picture is included in a recommendation.

Over the past 2 years I have taken part in many seminars to solicitors and accountants. In addition, I have been involved in speaking to numerous groups of the general public, plus retirement seminars. One thing which has been abundantly clear is that every one is concerned about the Community Care Act and wants to plan accordingly. This represents an in-credible opportunity for those wanting to be involved in helping people to plan.

Having spent the past 19 years advising clients on how to pass their estate on to their chosen beneficiaries, emphasis is now on ensuring there is an estate left.

Over the past year almost everyone in or near retirement has expressed concern at the thought of losing their estate, particularly their home to the Local Authority.

Increasingly, someone either knows of or is related to someone who is in care and watching their savings disappear or their property sold.

Planning, however, is not always easy.

There are many considerations and not all solutions are solutions. The following are the ones most frequently considered:

Rely on the State
Rely on the family
Rely on capital
Rely on the sale of the home
Rely on income
Rely on Long Term Care insurance
Rely on a legal solution

Perhaps the most widely held hope is that it will never become a problem.

It is the changing demographics which is creating the increased demands on our system.

The Demographic Time Bomb

1. Life Expectancy

50% increase in life expectancy this century
1900- 1 person in 20 over age 65
- 1 person in 700 over age 80
2000- 1 person in 5 over age 65
- 1 person in 50 over age 80
A male age 50 today can expect to live a further 28 years. Seven of those years will be spent in ill health and two spent in chronic ill health.

2. Proportion of the Total Elderly Population who are Disabled

Age 60+ - Almost 2 in 5 (37%)
60 - 70 - Almost 1 in 4 (24%)
70 - 79 - Over 2 in 5 (42%)
80 + - Over 3 in 5 (59%)
1/3 of people over age 85 live in Residential Care Homes
1 in 5 of those aged 80 or over suffer from Alzheimer's
55% of those aged over 65 are limited by a long standing illness

Living Longer Seriously Damages Your Wealth

1. Rely on the State

The 'cradle to grave' concept which those now in need had believed would take care of them, is in reality a thing of the past for all except those with little or no resources. Responsibility is and will continue to rest more and more on the individual, with the state providing a safety net for the most vulnerable.

2. Rely on the Family

This is usually the next option which is presented by someone who is asked what will happen in their old age. It is always great to visit the grandchildren and indeed the grandchildren enjoy the visit as well. The first few months is a novelty, especially if a new home was purchased to make space.

There are many situations where the reality is not as idyllic as it first appeared:

a.Divorce. This not only brings emotional stress but can bring no home as assets are split between spouses.

b Bankruptcy. Not infrequently a parent has found themselves in search of a home following their child's home being repossessed by a Bank after a business has failed.

c Repossession by a mortgage.

d Illness. When a parent becomes ill, perhaps Alzheimer's or a stroke which has left them paralysed, a family may not be able to provide the care needed.

e Independence. Fundamentally, a person does not want to lose their independence or become a burden on their family.

f Death of the relatives to whom it has been given.

3. Rely on Capital

Mr & Mrs Jones have joint assets of £150,000. They are both in care and their contribution towards the fees is £21,500 per annum. Assuming fees are increasing at 7.5% per annum and assuming growth of 5% on their capital, they would see it reduce to less than £55,000 in 5 years. A sum of £100,000 would run out before 5 years.

If capital is in a portfolio of shares then there is the added risk of share values falling, plus CGT on encashment. Clearly, in such circumstances, the advice of an Accountant, Solicitor and Financial Adviser all need dovetailing together.

Another observation is that if one is going to retain capital, in case it is needed to fund nursing home fees (which may not be needed), there is a danger of not enjoying today for fear of tomorrow.

Less than 6% of people age 75-85 need residential care.

4. Rely on Income

Frequently, the bulk of pensionable income is in the name of the husband. Although legislation will now allow a more fair assessment of this than hitherto, there is still the problem of a pension income being reduced on death.

Income is unlikely to rise at the same rate as nursing home fees. In any event, the average gross annual income of retired households in the UK is £10,000 (£5,000 for single households), clearly not enough to support the cost of Long Term Care without drawing on capital.

EXAMPLE

Mrs Beaver is age 94. She has lived in her nursing home for many years.

Unfortunately, her money has almost run out and the home in which she resides is costing more than the local authority will fund. Moving home at age 94 is not recommended.

There is a possibility that the rules relating to occupational schemes will be extended to allow members the option to take a variable pension. This could provide a larger pension in later years when someone is likely to need Long Term Care, in exchange for a smaller pension earlier on. Consultation is now scheduled to take place between the Inland Revenue and pension representative bodies to look at the viability of such an option.

5. Rely on Long Term Care Insurance

Long Term Care Insurance should not be considered in isolation. Anyone who is concerned with how to plan their affairs with regard to Long Term Care should dovetail the advice of a Solicitor and Financial Adviser to ensure the best combined package is selected.

Currently the sale of Long Term Care Insurance falls outside the Financial Services Act. There has been much concern inside the Financial Service industry to ensure that procedures are in place to enforce a high code of conduct is adhered to by those giving advice.

IFAcare has been formed to ensure a code of conduct is maintained by those

involved in care for the elderly. We recognise that a person is reticent in asking for financial advice out of fear. Fear because they are entering a jungle where they are vulnerable. When "HANDLING THE PROBLEMS OF THE ELDERLY" all advice should be co-ordinated by someone who is knowledgeable in this market and all options should be considered. The advice of a Solicitor, Accountant and Financial Adviser dovetailed together.

Long Term Care was introduced into the United Kingdom in 1991. After 5 years it is still in its infancy and product providers are still on a steep learning curve. From the many seminars I have taken part in, it appears that everyone involved in advising the elderly are all in a similar state.

It is undoubtedly true that Long Term Care Insurance will see many new entrants over the next few years and if we believe the marketing people, each will be better than all its predecessors. We have already seen some large names come and go, for example the Pearl and Clerical Medical. Another company which utilised a pension product was Lincoln National. After initially approving the plan, the Inland Revenue then changed its mind and ruled that pension schemes are not appropriate vehicles for providing Long Term Care insurance. It does appear that they are having a rethink on this point.

Currently there are fundamentally two types of plans.

A. Prefunded Plans

This involves paying for cover in advance. It is possible to take out a plan from age 20 to age 85.

The main providers are:

Commercial Union
PPP Lifetime
Scottish Amicable European

BUPA have recently launched a product and other providers are scheduled to launch over the next few months.

One important feature which does affect all plans is ADL (Activities of daily living). Claims are based on the insured person's degree of disability determined by how many ADL's they are not able to perform. They include:

Washing, Dressing, Feeding, Toileting, Mobility, Continence, Cognitive Impairment.

Different Plan Types

There is usually a direct link between the cost and at what stage the policy becomes payable. A person usually has to fail three ADL's before a claim becomes payable. For a higher cost, payment can be paid out after failure of two ADL's. One of the drawbacks which causes people to be reticent when deciding on taking out insurance as a solution, is the revaluing of the policy every five or ten years. Understandably entering into a contract where the future costs are unknown is not ideal. Fortunately such negatives are being addressed.

Another consideration is whether to have a plan with a restriction in how long the payment is made. A person will live on average for three years in a nursing home. Unfortunately very few are average. Having decided that a solution can be found within an insurance based product, next comes the task of finding the most suitable product. A client's needs have to be assessed to ensure that a product is most suited to their needs. Most providers offer plans which allow a person to choose a basic plan or one with more features. Typically, the most comprehensive plan will pay out a lump sum of say, £5,000 when 2 of the 6 ADL's cannot be performed. Plus up to half of the regular monthly amount of benefit. A standard cover plan will become payable when 3 or more ADL's cannot be performed.

Pool of Benefit

PPP Lifetime will reduce the cost by 30% in return for limiting the maximum amount paid for assistive device and care provision to 36 times the selected amount of benefit.

Partner Cover

Also available is a joint life policy. Partner Cover pays out when the second or surviving partner is no longer able to perform three activities of daily living or if they are suffering from cognitive impairment.

Care Counsellor

Another feature of Long Term Care Insurance is a Care Counsellor Service. When a claim is made an Independent Care Consultant is allocated who will give advice and assist in any aspect of care which will include help in choosing a suitable nursing home if required. They will also help with the organising of ramps for wheelchair access etc. to enable someone to stay in their own home as long as possible.

A Care Counsellor will stay in regular contact to ensure the care is relevant to their needs. The Counsellor will also liaise with the Care Provider and relieve the claimant of all administration.

Underwriting

Another area one has to consider when a contract is entered into is underwriting. Plus, how a claim is assessed. It can range from a Doctor's report to a full medical with an independent Doctor.

Guarantee Period

Traditionally, costs have only been guaranteed for 5 or 10 years. More recently Commercial Union have introduced a feature where the benefit which has been purchased with a single premium will not be altered once the client reaches age 70. Reference needs to be made to each product providers technical data.

Death before a Claim is Made

Typically, if a single premium contract is taken out, life cover is automatically covered for the first 5 years, returning a proportion of the payment on premature death.

Period before a claim can be made

Waiting period before a claim is made varies from 0 to 26 weeks. Usually it is a 13 week period.

Recurring Disability

Generally, a claim is treated as continuous if it recurs within 26 weeks of recovery from a prior claim.

Costs

A typical client is one who has reached age 55 plus and is in good health, has either a disposable income or access to capital and is concerned about provision of Long Term Care.

A male aged 68 would pay around £100.00 per month for a £1,000 per month benefit.

Alternatively, a lump sum of approximately £6,500 would provide a level payment of £1,000 per month benefit.

Some providers will allow regular payment plans to be made paid up after 5 years and cover will be reduced accordingly.

An alternative to the above is offered by Scottish Amicable. This is primarily an investment based product and has certain appeal to some clients. The Long Term Care Bond is a single premium unit linked Whole of Life Investment Bond providing long term care and investment benefits. The cost of the long term care benefit is met by de-allocation of units from the Bond fund. Rates are guaranteed for 5 years. The value of the underlying assets are not guaranteed and unit prices can fall as well as rise.

There are three products which are all variations of a theme:

Capital Growth Option
Capital Reserve Option
Protection Select Option

An investment is made into an offshore Long Term Care Bond. The type of cover is chosen and after the cost of Long Term Care benefits are met and normal management charges are deducted, the bond grows in a tax efficient environment.

Definitions:

Capital Growth Option
In the event of a claim the full Long Term Care benefit is paid to the Care Provider. The full value of the bond remains available to the client. On encashment before a claim is made the client can access the full value of the bond.
Capital Reserve Option
In the event of a claim the Long Term Care is paid from the growth on the bond until this is exhausted, at which the point the Long Term Care insurance starts to pay the care costs. On encashment before a claim, the full bond value may be accessed. Income options are allowed before a claim. However, withdrawal of income would reduce the capital return after a claim.
Protection Select Option
In the event of a claim, the Long Term care is paid from the FULL VALUE of the bond (including the original investment). After the bond has been exhausted the insurance contract starts paying future claims. There is no income option available with this plan. This type of arrangement is designed more for the individual who is perhaps more aware of the investment scene than the average person. It is able to cater for a number of different needs a client may have under one umbrella.

Tax Free Long Term Care Benefits Payment

Long Term Care benefits are not subject to tax. Also, under current legislation, payment of disability benefits from a single premium bond does not create a chargeable event. It is understood that the Inland Revenue will not impose any income tax charge on benefit payments for long term care services provided payments go to the care provider.

Tax Free Encashment Benefits for Spouse and Family

While the investor/donor will be the insured for long term care cover, the "lives assured" would normally be the donor's children and grandchildren so that the bond can have the potential to run on after the donor's death. Under current legislation, the donor's spouse and family can enjoy encashment benefits after the donor's death without any liability to further income or capital gains tax.

It is possible to utilise trusts to further enhance this product.

This product will be studied in more detail in the next issue.

B. Immediate Care Plans

For many, the opportunity to plan has passed. Due to the original 'cradle to grave' concept, very few in care are benefiting from being able to plan in advance. The immediate care plan is attractive for certain people who are in care and fit a particular profile.

The immediate care market is one which appears to be proving difficult for insurance companies to enter with any confidence.
Eagle Star withdrew their product from the IFA market and decided to sell through their own agents representatives only.

Currently, Commercial Union are the company most aggressively marketing the "Continuing Care Plan" aimed at those who are in need of immediate care. It is an impaired life annuity.

Each application is based on its own merit. An individual completes an application and Commercial Union writes to the Doctor for a medical report. This is usually sufficient for a rate/cost to be given. The tax position is the same as an ordinary annuity i.e. an element is return of capital and an element is deemed as interest. A subsequent issue will analyse this option further.

Someone may not fail the ADL test and yet need for a number of reasons to be in care. Mr and Mrs Morgan were in their eighties and were becoming frail and simply needed to be in a caring environment. They were below average in health and had resources as follows:

Share portfolio £190,000
House value £100,000
Building Society Savings £40,000
Fees for both equalled £35,000pa
Their income shortfall was £21,000pa

Both sons were financially independent and only wanted to know that their parents were taken care of in comfort. By applying for an impaired life annuity the income was raised above the normal annuity rates. The Nursing Home is happy knowing that a high portion of their fees is paid direct from a major insurer.

For a male aged 83 wanting an income of £21,000 per annum, the cost would range from approximately £89,000 to £130,000 with an indexation of 5% per annum.

Conclusion

Together with concerns over having adequate medical treatment and sufficient pension income, concerns surrounding the problems of the elderly person are now a major consideration to many people. The Financial Services industry will become very active in this market which is, I am sure, a concern to many readers of ECA. IFAcare has been formed to ensure that a code of conduct exists to safeguard those who need professional help. There are currently 50 members with in excess of 100 advisers who are competent to advise clients in this market.

Ken Hart has 19 years experience in the Financial Services industry. He is Membership Secretary and a founder member of IFAcare, an organisation committed to ensuring a high quality standard within the Financial Services industry.
For further information on IFAcare contact: Ken Hart, c/o Clifton Consulting Ltd, 94 Whiteladies Road, Bristol, BS8 2QX .