Guide to long term care

What is long term care insurance?

Given the high cost of long term care, it is surprising that so few people think about planning for the future. Insurance for long term care means that you pay (either in premiums or a lump sum) for your provider to take care of costs for you. State provision is currently very complicated and typically only assists people once their personal assets have fallen below a certain level. The level of help also varies from one local authority to another.

Covering long term care costs

There are a number of ways of paying for long term care. Many people pay their care costs from their income and out of their assets including selling their family home or releasing equity from it. There are three main ways of covering long term care costs: insurance-based solutions, annuity or the state. Each comes with its own benefits, risks and requirements.

Risk-based plans

Risk-based plans, which may be funded by single or regular premiums, pay up to a pre-determined monthly limit - usually until the policyholder dies or the care is no longer needed. As such, they are the only ‘true’ form of insurance for long term care.

Benefit payments are triggered when you are judged to be incapable of performing an agreed number of ‘activities of daily life’ such as washing, dressing or feeding yourself and moving from room to room. Payment of benefits starts after a ‘waiting period’, which varies from policy to policy.

The cost of the policy depends on:

• age, sex and state of health when the policy is taken out;
• the level of benefit;
• the number of ‘activities of daily life’ you are unable to perform before you can claim;
• the waiting period.

Insurance for long term care is not a particularly popular option for two reasons. Firstly, the majority of people do not want to consider provisions for such a late stage in life and secondly, the open-ended nature of the risk makes it difficult for insurance companies to offer competitive products. For this reason, most of the major providers have withdrawn from this market, leaving a limited choice of risk-based plans available. In 2011, the Dilnot Commission on Long Term Care made a number of proposals to improve provision by encouraging state private partnership. Dilnot’s provision, if adopted, would result in more insurance-based products to be available in the market place.

Immediate care plans

Immediate care plans are enhanced annuity products with higher payments than conventional annuities due to the lower life expectancy of the plan holder. This means that you pay a single lump sum in return for regular payments, either to yourself or the care provider. They are bought by people already in care or about to need care.

Under the terms of an immediate care plan, the provider pays you a guaranteed income for the rest of your life, which is used to pay long term care costs. Each annuity is individually underwritten and quotations vary widely from provider to provider depending on their actuaries' views of your life expectancy. Typically you either choose to have your payments start straight away or defer them for up to five years. Choosing a deferred period is more cost effective and caters for those who can fund their care needs in the interim. .

The payment is made up of taxable interest and a tax-free ‘return of capital’ element. The lower your life expectancy, the higher the return of capital element and the total level of benefit received. If the income is paid directly to the care provider, it is entirely free of tax.

A potential disadvantage of these schemes is that the capital is lost when the annuitant dies. However, capital protection can be built into the annuity so that the balance is repaid to the annuitant's estate on death if total payments are less than the amount protected,

It is also possible to guarantee payments for a minimum period of time (six months to five years), even if the annuitant dies in the interim, or link benefits to inflation - although such safeguards reduce the income yield on the annuity.

Immediate care plans are a good option for people who are not eligible for state-care, as they mean that you are able to use the assets that you have to pay for your long term care provision, knowing that funds will not run out. However, in order to pay for these plans, you may have to liquidate your assets. Insurance for long term care softens the blow of this cost.

State cover for long term care costs

The extent of state cover for long term care costs varies between across the U.K – although it is always means tested.

In England, Wales and Northern Ireland, means testing is used to agree how much of a personal contribution is required towards the cost of care. This is done by tariffs, so if your agreed tariff is £350 per week but the care home charges £400, then a third-party will have to cover costs.

In Scotland, the payments are split between the NHS and the local authority Residents of care homes can apply for either or both benefits according to eligibility – also assessed by means testing.

Means testing

The table below details the upper and lower limits for state-provided cover. If your assets equal the upper limit then you won’t be eligible for cover. People with assets below the upper limit have to contribute £1 per week towards their care for each £250 they have above the lower limit. Assets below the lower limit are ignored for means testing purposes. The upper and lower limits differ depending on which country within the United Kingdom you live in.

People in receipt of state help for long term costs must pay their occupational and state pensions and any benefits to the local authority. Certain categories of income, such as income from savings, are disregarded. Other categories, like pension income that is paid to a spouse not living in the same residential or nursing home, are partially disregarded.

Relevant assets include cash deposits, investments, bonds, premium bonds, National Savings, shares, unit trusts, property and the family home (unless a spouse or dependent occupies the property).

The family home is disregarded for 12 weeks before it is taken into account for means-testing. It may also be possible to enter into a ‘deferred agreement’ with the local authority to allow it to recoup an outstanding debt at a later date, although these are rarely granted.

The care recipient can keep a personal expense allowance (PEA), currently £21.90 per week, which is disregarded for means-testing.

If you have more than £23,000 in assets then you will not receive any state-help with your long term care. As such, identifying other options is definitely a good idea if you want to ensure that your long term care costs can be met, and long term care insurance is the best way of doing this.

Tips on insurance for long term care

• Remember, only one of the options detailed above is actually an insurance policy. Immediate care and state-covered care are available for if you haven’t planned for care, or if you can’t afford care.
• Immediate care plans can be a good way of avoiding tax, but only if you use them correctly.
• If immediate care seems like the best option for you, then think about how you are going to pay the initial lump sum.
• If an immediate care policy doesn’t have capital protection then you won’t get any money back.
• Paying for long term care insurance can get complicated – so consider consulting a specialist financial adviser.

Insurance for long term care can be a very good idea, so it’s a shame that it isn’t popular. Many people want retain their assets to pass on to their loved ones and considering your options for later life now and establishing a plan for funding long term care can help achieve that goal. Reading our guide to long term care is a great start, and our planning retirement guide has more information on the other aspects of later life.