Immediate Need Impaired Life Plans when used for Paying Care Fees

Philip Spiers of the Nursing Home Fees Agency reviews a number of impaired life plans and examines their effectiveness when used to fund care fees.

The Government's White Paper. "A New Partnership for Care In Old Age", asked for, amongst other things, responses to the possible inclusion of immediate needs annuities in partnership schemes for those requiring immediate care. The Government has now announced that having received over 500 responses, there is clearly more work to be done and plans to pass legislation must be put on hold until after the General Election. Whether or not such financial products receive the means testing benefits of the proposed partnership schemes, they will continue, in many cases, to have a very important place in the financial planning to meet care costs.

In principal, for the outlay of a capital sum, these plans can usually provide an income far in excess of that which can be achieved through traditional investments or annuities. Although there are very few providers of such products, their cost can vary substantially, depending on the company chosen, their actuaries interpretation of life impairment or the different tax treatment of both the funds held and benefits paid.

Impaired Life Annuities (Commercial Union, Sun Life, Pensions Annuity Friendly Society)

These should be less expensive than traditional annuities because they take into account the elderly person's life impairment as well as their age. However, the enhancement in income is treated as interest and not return of capital, consequently, the tax liability is significantly increased and the annuitant could lose their entitlement to age allowance.

Care Fee Payment Plan (Eagle Star)

Written as a series of pure life endowments they are usually less expensive than both traditional and impaired life annuities. They have a built-in six months premium protection death benefit and provide tax free income to basic rate tax payers, payable monthly in advance. The disadvantages are that the income is drawn from a taxed life fund, i.e. pure life endowments and it could effect the policy holder's age allowance. There is no facility at the moment to purchase this plan without the compulsory six month premium protection which could reduce its costs.

Immediate Care Plan (PPP Lifetime)

This has a cost advantage over the previous types of plan, mainly because it is written as a health care product under Schedule IV of the 1982 Insurance Act, whereby monies are invested completely tax free. Benefits are paid to a recognised care provider, therefore, no liability to income tax arises on the policy holder, nor does it affect their entitlement to age allowance. There is a facility to provide premium protection, but this will substantially increase the cost. Policy holders will also have the benefit of PPP care support services.

This product can only be used when paying a recognised care provider. It is not suitable for providing a monthly income if, for example, the care is being provided by the family. Technically, it is a health insurance and, therefore, although extremely unlikely, if the care recipient was to recover and no longer require care, the payments would stop (although it would recommence if health deteriorated again).

Immediate need plans are subject to medical underwriting and consequently, the terms originally quoted can vary up or down depending on the results of the medical information received after the insurance companies have consulted usually the client's own GP. Therefore, unlike any other form of life and health insurance, the more impaired the client's life the lower the cost. Taking into account possible reduced life expectancy enables the insurer to often substantially lower the cost.

Although the ultimate financial benefit to the person in care will depend on how long they live, the security these plans offer gives the reassurance and peace of mind that through the provision of a rising level of income care costs can be met for life, and that any remaining capital can be released with the principal object of achieving growth for the benefit of bequests under the will. Once accepted and commenced, payments under these plans are guaranteed for life, and will not be affected by any changes to the economy, interest rates or stock markets.

This type of plan can also have significant inheritance tax savings. Assuming that the estate on death will exceed £200,000 the effective cost of this plan to the beneficiaries will be 40% less than the purchase price. This, therefore, can significantly reduce the break-even point at which the estate will benefit from this type of arrangement.

Clients are not committed until terms have been offered from the companies to whom proposals are submitted. A decision must then be made, at which point the premium will become payable. No costs are incurred as all the administration expenses in the processing of an application and medical fees are presently borne by the insurer.

How do these plans fit into a portfolio of investments to meet care costs? Looking at those with both substantial and average capital significant savings can be achieved:-

Case Study 1 - Mr Smith

Mr Smith is in hospital, he has suffered a stroke and is now needing to move into a Nursing Home. Apart from a house valued at £75,000, he has £15,000 on bank and building society deposit. He is aged 80 and now needs total nursing care for the rest of his life. A home has been located where the fees are £400 per week (£1,733 per month).

Income	Per month
Basic State pension £61.00 per week	£ 265
Attendance allowance at higher rate (£48.50 per week)	£ 210
Occupational Pension (net)	£ 300
	£ 775
Cost of care	£1,733
	____
Income Shortfall	£ 958
	====

An immediate need plan providing an income of £1,000 rising by 5% per annum for life, nil capital protection will take care of the shortfall in fees and cost approximately £34,000. The remaining capital of £56,000 can be invested primarily for growth so that, should those assets grow at 7½% per annum, his capital would have risen to approximately £80,000 after five years. The break-even point to the estate (against leaving his money on deposit) would be approximately three years assuming a return on the investments at 7½% per annum. Beyond three years the savings become quite significant.

Case Study 2 - Mrs Jones

Mrs Jones, a widow aged 85 is now in need of care. She is somewhat confused and has failing health through arthritis and dementia. She is unable to walk and needs help dressing and bathing. She can just feed herself and needs help going to the toilet.

Property	£100,000
Building Society Investments	£110,000
National Savings Certificates and Income Bonds	£ 30,000
Bank Deposit	£ 10,000
	_______
Total Capital	£250,000

Income
State pension	£61.00 per week
She will also be receiving	£48.50 per week

The fees at the Nursing Home are £340.00 per week, leaving a shortfall of £230.50 per week, or £999 per month.

An immediate need plan to produce income of £1,000 per month rising by 5% per annum for life, no capital protection on death would cost approximately £42,000.

The balance of capital £208,000 including the sale proceeds of the property could be invested in various low risk investments principally for growth, but with a facility for income if required. Suitable investment plans can be established to provide steady growth, and, if agreed by the family, monies directed to appropriate Trust funds to enable such growth to be outside of the estate. Indeed, it is perfectly possible to arrange capital to meet fees for life and to make Mrs Jones a non-tax payer.

The effect of purchasing the immediate need plan reduces immediate Inheritance Tax Liability from £20,000 to £3,200 (i.e. saving £42,000 @ 40% IHT rate) the net cost of the plan at death therefore equates to £25,200. The period from which the plan must pay out to enable the estate to benefit from the transaction is reduced from approximately three years to just under two years. Consequently, not only does the plan secure a rising income from the remainder of the resident's life, but the family retain the remaining capital invested primarily for growth which, being partly in trust, will fall outside of the estate for inheritance tax purposes.

However, it is important to consider that access to some of the remaining capital may be required for the disposal by the resident should their care requirements become more intensive and the cost exceed those provided under the policy.

Standard plans do not normally provide for return of capital to the estate on death. Life cover or protection can be purchased for between six months and five years which effectively return the capital less payments made to the estate. Such guarantees would, however, significantly increase the overall cost.

Summary

The importance of immediate need plans and the sensitivity of judging when and where they are suitable cannot be over estimated. The efficiency of plans by providing a tax free income to be paid direct to the care home allows for terms usually substantially better than those that can be provided from traditional capital protected annuity routes. Families must consider the peace-of-mind factor coupled with the possible short-term loss of capital against the longer-term benefits should their relatives survive in care. In essence, therefore, the plans can be viewed as an insurance against longevity in care.

The Nursing Home Fees Agency has established Immediate Need Care Fees Plans with a number of insurers. However, before recommending such plans, the NHFA will assess individual cases and only where it would appear to be appropriate consider them as a suitable option against alternative portfolios of financial products used to meet care costs. Fully understanding how each plan works and how they fit into a client's portfolio to meet existing and future care costs is essential. Purchasing immediate need plans through the NHFA enables clients and their representatives to use the NHFA advisory services encompassing related matters, i.e. entitlement to DSS benefits in care, local authority charging procedures and community care issues.

Philip Spiers, NHFA, Old Bank House, 95 London Road, Headington, Oxford, OX3 9AE.