The media spotlight has been firmly fixed on the issues surrounding long term care over the last few...
The media spotlight has been firmly fixed on the issues surrounding long term care over the last few years.
The previous Conservative Government ran a consultation with care providers and the financial services industry with the ultimate aim of establishing a partnership scheme between public and private sectors for the provision of long term care. Then came the General Election.
As part of its 1997 election manifesto, Labour promised a Royal Commission to look into the future provision of long term care for the elderly. One overwhelming message coming from the report, which was published at the beginning of March 1999, was that there are a whole host of funding solutions to the long term care problem but no one all-embracing answer.
However, the future of long term care remains unclear after the Government delayed its response to the Commission's report by putting the proposals out to consultation until the end of the year. Any legislation arising from the Royal Commission's findings is not likely to occur until at least 2001 or even until after the next election.
Insurance role
The future for long term care insurance (LTCI) product providers is not quite so uncertain. Alan Milburn, the new Health Secretary, announced that LTCI does have a role to play in helping the public fund its long term care. He is looking for product providers and the Government to work together to explore how best to offer LTCI to the widest audience possible, something that has been welcomed by all in the financial services industry.
However, products cannot be designed with the needs of the customer in mind until it is totally clear what the Government will and will not pay for. Once this decision is made, it needs to be communicated to everyone, including the general public.
But life goes on and, unfortunately, all of the above does not immediately help those 40,000 people who are having to sell their homes each year to pay for care. These people need help with their funding now and long term care insurance can help.
Resistance
The LTCI market is currently quite small, with only about 40,000 policies written so far. Despite the high profile the need for this type of insurance has received, IFAs - apart from a few specialists - are yet to get heavily involved in the market.
One reason for a slow take-up in interest could be that LTCI is a relatively new concept. In the same way as critical illness insurance was a new concept over 10 years ago, there is always some degree of scepticism about new products, and LTCI is no exception. It can also conjure up some negative images in a client's mind. It is associated with sick elderly people, unpleasant nursing homes, wheelchairs and illness. It is, therefore, a less attractive proposition for clients than, say, an investment product.
But perhaps the main reason for the lack of IFA interest could be the continual delay from the Government in coming up with a definitive policy on long term care.
Can IFAs afford to wait? The Royal Commission recommended that the State should pay for 'personal costs' which include nursing, feeding and bathing, and the 'hotel costs' - living and housing expenses - should be met by the individual. IFAs would therefore need to help individuals arrange sufficient provision to pay for the 'hotel costs' should they ever need care. However, advisers should recognise that there is more to LTCI than a monthly cheque to the individual or care provider.
Independence
Private provision gives the client choice and enables them to retain their independence. Ask an elderly person where they would rather be if they were ill and the majority will say in their own home. LTCI gives them the choice to do this. If they did want to go into a nursing or residential home then LTCI allows them the freedom to choose a quality home and not be faced with one chosen by the local authority. It also gives them the opportunity to pass assets to the next generation rather than seeing them being used to pay for State care provision.
Giving people the ability to choose involves ensuring that the correct financial arrangements are in place and, as such, LTCI is a classic advice product and therefore a perfect market for IFAs to develop. It is worth noting that many are based around investment bond structures that provide IFAs with the ideal product to include in a client's retirement planning or investment planning portfolio.
IHT planning
Another area where long term care can become integral to an established part of the financial planning portfolio is inheritance tax planning. The main motivating factor for IHT planning is that the Government taxes the assets of the deceased person's estate at a rate of 40% on everything over £231,000.
Important though IHT planning is, it will only be of benefit if there is actually any inheritance left. Local authorities do not have to pay for care until an individual's assets fall below £16,000, so the future provision of long term care could represent a tax of 100% on all assets above £16,000. Even the rumour of this limit increasing to £40,000 is not adequate to protect the assets of most IFAs' clients, especially those in the south of the country.
There are also rewards for tapping into a 'young' market early. Take, for example, the critical illness market. Growth in the late-1980s and early- 1990s was slow, but IFAs that took the trouble to develop the critical illness market have profited from their foresight. The growth pattern of LTCI looks set to follow a similar shape, so similar opportunities exist for IFAs.
Wide product variety
There is a wide and varied range of LTCI products available to IFAs and their clients. At the moment the market is split into two types of products - immediate needs plans and pre-funded plans.
Immediate needs plans, as the name suggests, are aimed at clients in need of some sort of care arrangement now and need income immediately to pay for it. A single premium is used to buy an annuity that in turn provides the client with a regular source of income from which to pay some or all of the care costs.
Pre-funded plans are aimed at those clients wanting to make sure they have the means to pay for care should they need it in the future. These plans fall into two types - investment-based and risk-based. There is a wide range of pre-funded plans on offer, from regular premium whole of life plans to one-off single premium bonds.
As mentioned earlier, a key message from the Royal Commission's report was that there is more than one funding solution to the long term care problem. This provides LTCI product providers with a tremendous opportunity to look 'outside the box' away from a product that provides a specific financial benefit to providing a complete package of product, service and support designed to meet client's needs.
The Government is looking for products that are easily understandable, accessible and value for money. They may also introduce CAT standards for LTCI. One of the downfalls of the financial services industry is that we can sometimes overcomplicate things - something we cannot allow to happen to LTCI.
Product providers already recognise that LTCI is more than just a monthly cheque. The claims process is one area that needs to be handled carefully, discretely and tactfully. Most providers have care counsellors handling individual cases throughout the claims process and beyond. Some providers even arrange for people to come in to do the gardening and the shopping. It is these 'added-value' services that make a difference.
Combining products
So how will product providers offer long term care insurance in the future? Already some providers are incorporating long term care benefits in other types of regular premium protection products. Critical illness and income protection plans provide excellent opportunities to do this as the client can be covered beyond retirement age with benefits such as loss of independent existence. The proceeds from these policies can be used to either purchase an immediate needs annuity or provide the client with a regular income to pay any care costs.
For the future, it may be that regular premium long term care cover becomes more common as either a rider benefit to another cover or as an individual policy.
While the Royal Commission may not have provided an instant solution to the long term care problem, it has generated much press coverage and people have become aware of the issues surrounding it. For some clients, now could therefore be the time for IFAs to put the subject on the agenda.
Laura Shanks is assistant product marketing manager, protection at Scottish Provident
