Feature

posted 1 Nov 1996 in Volume 2 Issue 1

Funding Long Term Care

Ken Hart examines the problems of the Elderly in residential care living significantly beyond the biblical three score years and ten

Many in practice who are involved in advising the elderly are finding that frequently calls are from those either in care or on the verge of entering into a nursing or residential home.

For these the reality of the Community Care Act is not some vague piece of legislation which may not affect them, rather it is translated into a piece of reality which says I shall have to sell my home and use my 50 years of savings to fund for this care I now need.

In such circumstances very little practical help can be provided.

I have recently had a client referred to me who was in this situation. The solicitor was concerned that his client would not be able to maintain the fees required to remain in the home of her choice.

In this article I shall examine an option available for someone in this situation.

EXAMPLE:

Mrs Brown is an 85 year old widow with £120,000 savings in various places. She has a house valued at £85,000. She has two children who are financially independent. She has a wish to pass on as much of her estate as possible to her two children. She is in a home costing £385.00 per week (£20,010 per annum). She wants to keep an income of £50.00 per week for personal needs. Her net income after taxes is £13,500 per annum. She has a shortfall of £9,000 per annum (£6,500 + £2,500).

This is not an infrequent story. For many the amounts available are smaller, this of course makes it even more important to preserve as much of the estate as possible.

What are the alternatives which can be considered? As always the important and overriding consideration is to ensure that the elderly client who has perhaps been in a home for many years is able to maintain a degree of comfort and retain dignity. However, a real concern for many clients is that they do not want their total inheritance to be lost from their estate. Also it is not known how much fees will increase by. Another unknown is whether or not an individuals' health may deteriorate and require even more income from resources to cover the cost of care.

One alternative is to look at purchasing an annuity. A downside to this is obtaining a decent annuity rate, particularly when rates are low, one unexpected increase in inflation would suddenly make an annuity seem like"bad news". Secondly, a person in a residential home is usually there because their life expectancy is reduced due to failing health. Therefore, to have an annuity which would cease upon death when death may be quite soon seems a little loaded in favour of the insurance company.

The insurance industry is responding to this need with products designed to cater for someone with a below normal life expectancy by paying a higher than normal annuity. The theory being that if an individual has a reduced life expectancy then it is not unreasonable to offer an increased income than would otherwise be enjoyed.

This is only part of the story, because, if a lump sum of money was committed to an annuity of this type then fees rose in excess of the income a problem would exist both for the individual and the care provider.

Therefore, it is also possible to have an agreement with a care provider where the fee increases are matched with the increase in the annuity income. Indeed, for both of the products we shall consider in this article an option exists to build in an indexation on the whole fee and not simply on the "insured" element.

Most care providers are keen to be able to secure their income and if an annuity is capable of guaranteeing them, not only an income today, but also a guarantee for tomorrow it gives the care provider peace of mind. Perhaps, more importantly however it gives peace of mind to the resident and their family, to know that they can spend their remaining years in a home without fear of running out of money.

An elderly couple who I helped last year were forced into a home due to ill health. One year on and they would not now qualify for an annuity on the basis of poor health as their health has improved significantly. They are in a home where all their needs are met and where they know they have their fees met with no fear about tomorrow.

We are going to review in broad terms this concept and look at two of the providers who are in this particular market.

Commercial Union - Continuing Care Plan

The Commercial Union plan is an impaired life annuity which can either be level in payment or it can be indexed up to 10% per annum.

While there is an overall benefit limit of £25,000 per annum before any escalation is chosen, this is adequate for most individuals.

A plan with CU is available for anyone aged between 60 and 90 years of age.

A question which is naturally asked is what happens on death. The regular amounts paid out are guaranteed for at least one year. (This can be extended for up to three years. If the person dies during this period, any remainder of the guaranteed term still outstanding is paid to their estate or to the planholder if they are not the person receiving care.)

Please note the plan holder might be a family member. Where a person is receiving State help because of lack of resources it might be a relative who would want to purchase an impaired life annuity to enable a better or higher standard of care.

EXAMPLE:

A Female aged 85 needs income of £9,000 per annum after all other income and benefits are taken into account.

The payments will of course depend on the state of health of the person needing care. A firm quotation cannot be supplied until a proposal has been fully assessed. The following is a guide to indicate the range of income which can be achieved. See Figure 1.

State of Health	Payment after Payment of Basic Rate Tax	Amount Paid
Below Average	£8,360 pa	£50,000
Poor	£9,540 pa
Very poor	£9,540 pa
Ordinary annuity	£6,782 pa

The benefits are paid monthly

The first payment will normally be made one month after the single premium has been paid.

Death Benefit

In the above example payments will cease on death unless death occurs within three years of commencement, in which case any balance will be paid out as outlined above.

In simple terms someone paying £50,000 would receive back a total of just over £30,000 in three years. If the person's estate was subject to inheritance tax then there is a reduction in the IHT liability.

Income Tax Position

A part of each regular payment under this arrangement supplied by Commercial Union is treated as a return of capital and is not liable to tax. The remaining interest element will form part of the plan holder's taxable income. In the above example the interest element is varies between £2,050 per annum for a person "below average" health to £4,509 per annum to someone in "very poor" health.

The above assumes income tax at the basic rate of 20% is deducted from the interest element of each instalment. If any part of the interest element is subject to tax at a lower rate the additional tax already deducted may be reclaimed. Equally, if the plan holder is a higher rate tax payer, there will be an extra liability to tax on the interest element of the payments.

If the plan holder is not subject to tax, the Revenue might allow the payments to be made gross. Clearly, it is important to take the advice of an expert to ensure any plan fits in with the whole picture. There is always a danger of solving one problem and creating another one.

Eagle Star - Care Fees Payment Plan

Eagle Star were one of the earlier companies to offer a product designed to cater for someone in below average health needing to pay for Care Fees. The product offered by Eagle Star differs from the type offered by Commercial Union in the following way.

It is a series of endowment policies which mature on an annual basis.

The Eagle Star plan is similar to the CU Plan in as much as the cost is dependant on the state of the individuals' health. The age range is from age 60 to 95. An indexation can be built in as follows.

- A fixed rate of up to 10%.

- Retail Price Index
- Retail Price Index plus 2%.

Surrender Values

Surrender of the Care Fees Plan will be allowed within 90 days of the inception of the plan provided that all policies are surrendered together. The surrender value will equal the purchase price of the plan less plan costs and less any payments already made.

Death Benefit

The plan includes a decreasing term assurance benefit which is available for a period determined at outset of 6,12 or 24 months. The death benefit is equal to the purchase of the Care Fees Plan less any payments made prior to the life assured's death within the chosen death benefit term.

Should death occur outside the death benefit term no further benefit or payments will be made to the planholder or their estate.

As with the Commercial Union Plan the plan holder can be different to the one in care.

Taxation

Fundamentally payments arise from a series of maturing endowment policies. The following tax details relate to the maturity value of each policy.

There is no liability to Capital Gains Tax
Income tax may be payable on any gain if the individual is a higher rate tax payer.
No income tax is payable on a claim by death.
any age allowance to which someone is entitled may be affected.
If someone reaches age 105 then Eagle Star continue to make payments by a deferred life annuity, part of this will be subject to tax at the marginal rate (currently). Eagle Star undertake to ensure that payments, after deduction of basic rate tax, will be maintained at the then existing level, and will provide any agreed increases.

Figure 2
State of Health	Payment	Cost
Below Average	£ 7,596 pa	£50,000
Poor	£ 8,508 pa
Very poor	£10,068 pa

To receive a plan which had an indexation of 5% per annum would reduce the initial income by in excess of 10%.

Summary

The purpose of this review is not to provide definitive answers.

The important matter to consider is that a client who is currently in care and has cash sums which are being eaten into in order to pay for care should at least have the option as outlined in this review considered.

As with so many areas surrounding the giving advice to the elderly it is becoming important to dovetail the advice of Solicitor and Financial Adviser together to ensure the client obtains the route most appropriate for their circumstances. ECA.

Ken Hart, Clifton Consulting Ltd, Tel: 0117 974 4800 Fax: 0117 970 6277