Prefunded long term care insurance - Elderly Client Adviser

Feature

posted 1 Jul 1999 in Volume 4 Issue 5

Prefunded long term care insurance

Introduction

To begin with long-term care insurance is a concept rather than a specific product. It can most easily be defined as "a financial solution to help meet the cost of prolonged non-acute nursing needed in the event of a chronic disability". Benefits can contribute towards the costs of: -

Care at home

Care in a residential or nursing home

Adapting the home and installing devices to make it easier for someone to stay at home

Help with domestic chores

Why Insure?

There are two main reasons to insure against the possibility of needing care. The first is to be able to afford the standard of care you would hope for, the second is to prevent care costs eating up all your capital so that you have little or nothing to pass on to your family and friends. Residential homes can easily cost £20,000 or more a year and nursing homes £25,000. Similar costs could apply for intensive nursing care whilst remaining in the family home.

Long term care incorporates a number of risks, i.e. will care be needed at all, when will care be needed and how long will care be needed? By sharing the risk an individual can protect himself against these uncertainties for an amount usually far less than would be needed to put aside in savings to provide the same level of protection.

Not suprisingly sales of pre-funded insurance based schemes have dipped significantly in recent months as a result of the inactivity of government posed by the findings of the recent Royal Commission. One can only surmise as the reasons why the government sees fit to seek further debate on this subject before deciding on legislation. It seems unlikely though that any quick conclusions will be reached and the matter will be referred on to be debated at the next general election.

In the meantime, older people must consider whether they wish to rely upon Social Services for funding or take matters into their own hands. Purchase of pre-funded insurance may be viewed as expensive, the cost of course is a relative value and must be considered against the overall benefits offered and the peace of mind provided to policyholders.

Product Types

These can be divided broadly into four types:-

Those that pre-fund for long term care providing a fund, which will meet the cost of care at some unknown time in the future. Policyholders pay a regular, annual or monthly premium or a one off single premium

Those that offer cover linked to single premium investment bonds that allow individuals to invest capital in a number of funds.

Limited long term care is also provided by an option on other policy products such as critical illness plans. Unlike the first three types of insurance, these pay a one off lump sum rather than a regular monthly benefit

Those that offer immediate cash, taken out at the time the person needs care. In exchange for a single premium they provide a guaranteed income to meet or help to meet care costs. (This will be the subject of the next article)

* Badged products - Allied Dunbar's 'Lifetime Care Protection Plan' is essentially a PPP Lifetime Care badged product, with both names appearing on product literature. Irish Life's product is essentially an investment vehicle. It bears Irish Life International's name, but is reinsured with PPP Lifetime Care, who provide the claims service. Under Royal Skandia's 'Care Account', the long-term care services are managed by BUPA.

^ Turnkey arrangements - Abbey Life write a long-term care product with Hambro Assured Care in a turnkey arrangement. This is written under the Abbey Life name and Hambro act as third party administrators and reinsurers.

+ These products are primarily investment bonds

The products are all different making direct comparison difficult, below is a summary of the main product features. Consequently it is very difficult to make an assessment and recommendations based upon a company that for example is offering the lowest premium Simply identifying the cheapest policy may be woefully inadequate for the needs and objectives of the client.

Premiums

Premiums vary by age, state of health, type and level of benefit and are generally higher for women. There are plans offering both single premiums and regular premiums. Premiums are generally reviewable although some companies offer limited guarantees. In addition discounts are often available for both spouses taking out cover at the same time

Benefits

Most policies repay costs of up to a fixed amount for each week of care received, either at home or a nursing home. Other benefits including advice on all aspects of care needs, telephone help lines, help with adapting the home, assistive devices e.g. stair lifts, grab rails etc, home maintenance, access to care counsellors and consultants, home help, emergency alarm and installation, adult day care, recuperative care in home and respite care for informal carers. When LTC was first introduced most benefits were paid direct to the care provider to avoid taxation on benefits. However, with effect from April 1996 benefits on risk based insurance may be paid in the form of cash free of income tax direct to the policyholder.

Benefit Triggers

When benefit is payable it is determined by the insureds degree of disability. Companies base eligibility for benefit on the insureds inability to perform certain "activities of daily living" (ADLs) which generally include washing, dressing, feeding, toiletting, mobility, transferring. Benefits will be paid subject to policy conditions between the failure of two or possibly three ADL failures.

All products also pay benefits on cognitive/mental impairment if it results from organic cause and the insured needs continual care or supervision, e.g. Alzheimer's or senile dementia.

Duration of benefits

All providers offer lifetime benefit periods. Some also offer the option to restrict the benefits for a limited term ranging from two to ten years. One must question the value of a policy that restricts the term of benefits since it poses the question of what happens if the insured survives the benefit period. Whilst the premiums are often significantly cheaper, it hardly provides peace of mind!

Deferred Period

Benefits are only payable if care is still required at the end of a deferred period. This usually ranges from between 4 to 26 weeks. The longer the deferred period the cheaper the premiums. Most common deferred period is 90 days.

Inflation Protection

Most policies include inflation protection of at least 5% per annum. The rate may be linked to increases in the retail prices index or the national average earnings index.

Surrender Value

With the exception of the investment bond products, Scottish Widows pre-funded policies and Permanent Insurance, no others offer a surrender value.

Practical Considerations

To help reduce the premiums only insure for the difference between known income and possible care costs. When calculating the shortfall make sure to take account of a non-means tested benefit called attendance allowance payable to those that need care. Lower rate benefit is £35.40; higher rate benefit is £52.95.

Affordability

If the cost of funding potential shortfall exhausts savings or soaks up a large proportion of spendable income, is there really any point in purchasing a plan? Similarly there is little value in supporting part of the shortfall as the consequence could mean that the benefit is used pound for pound by Social Services towards meeting care costs, with the balance being drawn from clients diminishing capital.

Product Assessment

To begin with beware of: -

The level benefit mirage - Policies are sold offering level or escalating benefits. Level benefits means that you receive the same sum each month once the claim is settled. With the effects of inflation level benefit policies would fall well short of bridging the gap to meet care costs. Level benefit policies are much cheaper than their escalating equivalent but they will rarely solve the problem.

Offshore expenses. Prefunded policies based offshore can charge penal fees. High fees make it even harder for funds to deliver the investment performance needed to maintain the value of their fund, let alone grow in line with the market

Investment bonds with exit fees on death - when the policyholder dies some bonds will charge a fee to the estate when the insurer pays the fund proceeds. This is another example of insurers avoiding taking any risk themselves at the expense of the client or their estate.

Some companies you will be able to ignore because of their high premiums and excessive charges. Some however make this assessment difficult by submerging you with data and figures so complex to make meaningful comparisons difficult. With some policies you may question their true objectives. By that I mean for example marketing of investment products in the LTC market when the primary aim of the company is more to capture large single premium investment business than it is to provide a long term care solution for the policyholder.

Perhaps a more meaningful way to assess the long-term commitment of the Insurer is whether they have their own in house Care Support Service. Sometimes even where they do it appears more of a token response to market forces. Ultimately the test of these policies is how they deal with claims. For unless they can be seen to be delivering a caring professional support service a lot of clients could well be wasting their money.

Those companies that currently meet the 'total commitment test' i.e. provide value for money with peace of mind include Norwich Union, PPP Lifetime, BUPA and Scottish Widows.

Conclusions

Not suprisingly the media have generally been critical of the LTC products, the selling methods employed and the charges imposed. Nevertheless, clients should not ignore the potential benefits these types of policies can offer. If sold correctly taking account of client's wishes, attitude to risk, their financial and tax position, these products can offer a genuine and worthwhile solution and provide peace of mind. Care however must be exercised in ensuring the clients actual needs are best served by these products and the correct package of benefits is matched to them.

To this end the professional financial adviser must have a full knowledge of the long term care products, the benefits and drawbacks and consider not only what may be appropriate now but also in ten or twenty years time when an increasing number of these policies turn into claims. You need to be confident that the policy you sold them will solve the problem!

But don't despair, clients might prefer to wait until the need for care arises and then buy an immediate care plan. If that seems too good an option, you're right - usually the premium costs are substantially higher. As a general rule - if you know you're going to need care in the future, purchasing a prefunded plan will save your clients money!

Unfortunately most clients will take the view that it won't happen to them and so why insure at all. Remember 'denial is not a river in Egypt'

To conclude clients have four choices: -

Rely on family and friends

Divest assets and rely on the State for minimum care support

Accumulate sufficient wealth

Insurance

Peter Fisher, Nursing Home Fees Agency