Long term care: A demographic timebomb

Advisers are missing a trick with long-term care insurance, writes Joanna Faith.

The UK is facing a ticking demographic time-bomb thanks to an ageing population. Government figures suggest the number of people aged 85 and over, the ‘oldest old’, has increased rapidly. In 1983, there were just over 600,000 people in the UK aged 85 and over. Since then the number has more than doubled to 1.3 million in 2008.

Developments in medical science mean more of us will live longer. By 2033, the number of people aged 85 and over is projected to more than double again to reach 3.2 million, and to account for 5% of the total population. While a welcome statistic for many, the pressure it will put on the public purse cannot be neglected.

“This is going to be a burgeoning problem and politicians are trying to come up with something attractive to the public but good for the state,” says Brian Fisher, marketing manager at AXA Lifetime Care, one of only two providers in the UK offering long-term care (LTC) products.

But none of the three main political parties has come up with a coherent, thought-out policy to fund long-term care for the elderly. So it looks like the private sector will be left to foot the bill.
Currently, adults must undergo a means test before they move into a nursing home for long-term care. In England, those with more than £22,250 in assets must pay their own way.

People with assets valued at between £14,000 and £23,000 pay a small contribution, while the local authority pays the entire fee for those with assets below £14,000

Figures suggest 40% of people going into residential care are self-funded. With the average cost of a private care home with nursing staff reaching £664 a week, and a lack of support from the state, many elderly people are being forced to sell their homes or turn to savings intended for their children’s inheritance to cover care costs. Otherwise, the rest of the family is faced with the bill.

Despite these statistics, the pre-funded LTC insurance market is practically non-existent, apart from one Partnership product.

“There used to be more pre-funded insurance products on the market, but they were withdrawn,” says Andrew Neligan, a financial planner at Informed Choice.

Commentators say this was down to a combination of high costs for providers and consumers, the need for highly experienced and specialised underwriters, an uncompetitive product and people burying their heads in the sand.

An alternative product, which providers offer, is an immediate care annuity.

This point-of-care product provides an annuity that will deliver a guaranteed regular income to pay for care. As the income is paid directly to the care provider, it is tax free.

“Buying an immediate needs annuity benefits the resident because their liability is capped, the family because inheritable assets are ring-fenced, the care home because of the continuity of inflation-linked cash and the local authority, which will not have to deal with residents running out of money,” says Chris Horlick, managing director of long-term care at Partnership, the second provider of LTC products.

Yet he says, of the 40% of people self-funding their care, only a tiny proportion gets expert financial advice. This presents a major opportunity for IFAs.

Missing a trick

Fisher says advisers are missing a trick by not advising on LTC. “Around 70% of UK wealth is in the 50 plus age group so most IFAs’ clients are 50 or over. These are exactly the people whose parents are at the age when they need or might soon need care,” he says.

Advising on LTC makes sense, not just because it is a looming issue that will not go away, but also from a commercial standpoint.

It allows IFAs to offer expertise in other areas, adding value to clients. When people enter care homes, they typically sell their homes. Average property equity in the UK is £198,000 and the average immediate needs annuity is £80,000. “That leaves a surplus of money that IFAs can advise on,” says Horlick.

Yet despite the obvious opportunities there are very few advisers providing LTC advice.
Mark Osland, director at Formula Limited, says more products are needed.

“We have some of the best insurance companies in the world, yet regulators and politicians seem to think these products, like equity release products, are just there to rip off the elderly.

“It is a shame there was a decline in the number of products. There is the need for more pre-events insurance products in the market to ensure people can be kept in the homes they want and do not run out of money,” Osland says.

Advisers are also put off by the CII CF8 qualification needed to give LTC advice.

“Risk, complexity, a lack of knowledge and often having to deal with older clients and their attorneys may turn advisers off,” says Neligan.

But Horlick says the application of immediate needs annuities is straightforward. “There are only two providers in the market, so advisers do not have to do a whole lot of research,” he says. “We would also help them get their CFA qualifications.”

In a post-RDR world, where adding value and obtaining more qualifications should be high up on an IFA’s agenda, advisers cannot ignore the possibilities that come with offering specialist LTC advice. It is the obvious way to add another string to their bow.