Will the long term care reforms really make it easier to insure your risk?

22nd February 2013

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Cynics might say you can’t take your money with you into the next world, but in the words of Labour health shadow Andy Burnham, the current regime is ‘a cruel lottery where people go in to later life with everything they have worked for on the roulette table’. John Greenwood considers the issues.

The big problem with care costs for the elderly is the uncertainty. Going into a home can be like signing a blank cheque. You might know how much a week you are going to pay, and with costs of up to £1,000 a week care homes are by no means cheap, but you have no idea how long you are going to be paying for.

With nursing care costs exceeding £100,000 for one in ten of today’s 65-year-olds, and 40,000 people a year having to sell their homes to pay for it, it is no surprise that care funding has become something of a hot potato.

Where people face the risk of a large financial penalty, insurance companies usually step in to cover the risk. And one of the aims of the proposals put forward by health secretary Jeremy Hunt earlier this month is to create a more certain framework around long term care costs in the hope that financial services providers will be encouraged to design products to plug the gap.

So first of all, what is the government proposing? The cornerstone of the Government’s proposals is a care cap, that will say nobody pays more than £75,000 towards their long-term care costs over their lives, to be introduced from 2015. So when you start paying for nursing costs, whether in your own property or in a care home, the meter starts ticking, and when you get to £75,000, the Government takes over the cost.

The cut-off for receiving care at all will also be increased. Under the current rules anyone with assets over £23,250 receives no financial support from the state at all towards residential care costs. This threshold will be increased to £123,000. Both figures include the value of your house, but the government is also saying from 2015 nobody will be forced to sell their home during their lifetime to pay for healthcare the costs, but will be given the ability to defer payment until after their death.

But the response to date from the financial services community to date has been muted to say the least. No insurers have come out and said they intend to come in with radical new products to offer insurance against this more limited financial risk – the principal reason being the risks are still so uncertain.

Insurance products already exist to cover the risk of having to pay care costs for more years than you can afford. But these products, called ‘immediate needs annuities’, are bought at the time of going into care and require a large amount of capital. For example, a healthy 85-year-old going into care could secure an income towards payment of care costs of £24,000 a year for life for a single premium payment of around £160,000.

Insurers are happy to take on this sort of risk because they know who the individual is, they are certain they are going to claim, and they have a fair idea how long they are going to live.

But the idea of insurance against long term care in the broader sense, where healthy people who don’t know whether they will ever need care would insure against an unknown need, looks unlikely to get off the ground. There are just too many variables for insurers to offer longer term insurance products to anyone in their 30s, 40s, 50s or even 60s. How long will the individual live; how long will a typical stay in care be in several decades time; how much will care homes cost in future; what will investment markets do over the next thirty years; how much capital would the insurer have to put away to be sure it could pay out when the time came? These factors mean long term care insurance in the fullest sense is unlikely ever to see the light of day.

In fact insurers have already tried to market such products, with dubious success. In the 1990s both Axa PPP and Scottish Amicable, subsequently acquired by the Pru, both sold lifetime annuities where the healthy and able individual paid a single lump sum and ‘if you need future care, the policy will pay the fees’. Unfortunately the small print allowed the insurer to cut the benefits unless you paid them more money. The Ombudsman finally ruled this was unfair and that Axa should compensate customers. And the insurance industry walked away from trying to cover such long-term risks.

But that is not to say financial services providers will do nothing. Instead expect pensions to be developed to allow them to better cope with paying for long-term care costs. It is early days, but experts suggest this may involve using income drawdown to pay for care costs, benefiting from tax relief and allowing assets to be passed to heirs.

Hunt’s plan is no silver bullet, but it makes the costs of long term care a lot more clearly defined than they were.

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