Edward Murray: Do you need cover for long-term care costs?

INSURANCE designed to cover the cost of long-term care has almost disappeared, but new products could be set to hit the market as concerns grow over the care funding crisis.

Experts believe the Dilnot Commission, publishing its report next month and tasked with investigating how affordable and sustainable long-term care can be delivered south of the Border, could have implications for people throughout the UK.

Currently there are no insurance providers offering policies to cover the cost of long-term care. Partnership was the last player standing, but pulled out recently due to poor take-up and uncertainty around what would and would not be covered by the state going forward.

Jim Boyd, director of corporate affairs at Partnership, said: "We have suspended our pre-funded products and are awaiting the outcome of the Dilnot inquiry. If the government wants to kick-start the pre-funded market then presumably there will be a range of incentives and inducements and so for that reason we are parking it up at the moment and waiting."

Although the Dilnot Commission is only looking at the situation south of the Border, any new long-term care insurance products its recommendations help to generate will be welcomed in Scotland.

The number of pensioners in Scotland is projected to jump from 837,000 in 2006 to 1.36 million in 2031, according to the General Register Office for Scotland. As such, the need to find a viable financial solution for the provision of long-term care is essential.

The Scottish Government provides a level of financial support to those needing long-term care but it by no means caters for everybody, and will leave most individuals either picking up the tab for themselves or facing a shortfall (see panel below).

There are a number of problems with long-term care insurance policies that have, to date, prevented them from becoming mainstream options. The provision of state funding is mired in confusion, and getting to the root of what is available is not always easy. Many people simply believe, incorrectly, that the government will look after them in their old age, whatever happens.

Long-term care insurance policies have also suffered from cost issues. Younger people tend not to prioritise insurance, and by the time they get round to thinking about it and potentially buying a policy, the cover has become a lot more expensive, ultimately acting as a deterrent.

Attracting people to purchase the cover early would help keep premiums low, but it is not something the market has managed.

Then there are the regulatory issues that have prevented insurers from developing products that could overcome these challenges.Some insurers, including Edinburgh's Bright Grey, have previously developed income protection products which have long-term care insurance options built into them.

When policyholders hit retirement, they would continue to pay the premium, and the income protection policy would essentially turn into a long-term care insurance policy. Roger Edwards, proposition director at Bright Grey, explained: "The beauty was that because the majority of people would take it out in their 20s, 30s and 40s, and were a lot younger than people taking out pre-funded long-term care products in their late 50s and early 60s, the actual premium to cover the long-term care element was microscopic."

Although Bright Grey was selling this product to young people, the Financial Services Authority decreed that it was ultimately a product aimed at the elderly and ruled that financial advisers needed special permission and qualifications to sell it. This meant the product could not be sold by the main body of financial advisers in the UK, and ultimately it was pulled. There seems little prospect of any significant changes in the rules around who can sell products to the elderly, and so similar products to that developed by Bright Grey are unlikely to become available in the short term.

So just what else is available? The other main avenue of long-term care financing is through an immediate care annuity, often referred to as an immediate care plan. For a lump sum payment the annuity pays, when needed, a set benefit to cover the cost of care.

Payment of the benefit can either start as soon as policyholders meet certain criteria around their care needs or it can be deferred for a nominated period to reduce the cost of the annuity. The benefit can be paid directly to the care provider, meaning it is tax-free and it also gives individuals certainty that they will be able to finance their care needs no matter what age they live to. Watt said: "The great thing about it for me is that you have a known cost for your care. Average care costs in Scotland are around 550 a week.

"Most people have some sort of pension income which will be able to fund some of that at least. They might have a shortfall of 250 a week or around 1,000 a month. It may cost them 100,000 to buy an annuity that covers that, but they know that if they pay that then no matter what happens the shortfall is paid for until they die."

It is also possible to incorporate a degree of capital protection into such annuities so that if individuals die shortly after purchasing one, their estate will recoup a significant amount of the premium.

Partnership and Axa PPP are currently the main providers of immediate care annuities and rates are dependent on individual circumstances. While the options remain limited for people looking to contain their long-term care costs, any new solutions must be workable and wide-reaching if they are going to be effective.Johnny Timpson, head of market development at Scottish Widows, said: "Future development will rely on having a public policy framework that motivates the customer to make personal provision, promotes consumer education on the issue and creates a 'care covenant' between the state, the individual and their family."

The findings of the Dilnot Commission will hopefully be the first step towards creating this sort of framework, both north and south of the Border.

People with assets, including property, of more than 23,500 have to self-fund their long-term care needs. If individuals are over this threshold, the Scottish Government will still provide 159 a week for personal care and 72 a week for nursing care so long as certain criteria are met regarding their needs. However, there is no provision made for accommodation and living costs, and these can make up a substantial part of an individual's overall care bill.

Further details are available at: www.careinfoscotland.co.uk