Time to wake up to long-term care

Faced with prohibitively expensive products, advisers are shunning long-term care.

Long-term care (LTC) is the product that should sell; the need for it has never been greater, but the availability of affordable products has never been poorer.

Advisers often cite this lack of availability as one of the main reasons for the poor take-up of long- term care products which, in turn, makes it a less appealing business proposition for advisers. Faced with two types of products – one which demands a lump sum and the other with uncertain and expensive premiums – advisers are giving up the ghost.

A lack of innovative products represents a missed opportunity, according to Liz Faye, a certified financial planner and presenter for the FSA’s Financial Capability in the Workplace team. She says: “According to research, the number of 85 year olds will more than triple in the UK from over 1.3 million in 2008 to seven million in the year 2081.”

Like other advisers specialising in LTC, Faye believes better products will encourage more advisers  into LTC and, in turn, make something pretty unpalatable more marketable to those that need it.

Faye believes there are ideal products already out there, two in particular she feels could, with a few tweaks, be a panacea for self- funders. She admits most of her clients are relatives of those needing care, and they are forced into purchasing immediate needs annuities.

Pre-funded products

She believes pre-funded products help the client to prepare themselves for the worst, and stop their family having to raid the family silver to pay for an immediate needs annuity.

Faye believes Partnership Assurance’s Care Prepared product – the only pre-funded product available – is the ‘almost ideal’ product.

“Care Prepared is for clients who are between 50 and 75 only, and in good health. They will be worried about the cost of things and want to plan ahead,” she says.

Faye admits Care Prepared, which can be paid via regular or lump sum, has a few snags. She says: “The premiums are reviewable after five years, and at that stage in life, health problems can often occur which seriously increase the cost of the premiums.”

Faye feels if more insurers offer pre-funded insurance the cost to re-insurers would come down.
“A lot of providers have left the pre-funded market, but I feel that awareness of the need to pay for care and to provide for that payment has never been greater. Pre-funded care is the way to go: the more providers that offer it, the cheaper and more competitive it will be.”

Another option would be to add LTC to a policy, such as Critical Illness cover. Faye cites Lincoln’s Elderly Care Cover as a good example. She says: “This pays out a guaranteed cash sum if you are unable to look after yourself. It is cover that can be taken out any time between 18 to 79. Again, because there are so few products out there, this is expensive, but I believe if more competitors enter the market the cost will come down.”

But Danny Cox, head of advice at Hargreaves Lansdown, believes pre-funded products will remain too expensive and providers will continue to shun them.

He says: “The reason many of the LTC pre-funded insurance policies were pulled is because the cost of care, and the number of people that would claim on them has been under-estimated. I cannot see any providers wanting to look again at the pre-funded market unless a future government makes LTC insurance compulsory for anyone who can afford it.”

The solution Cox offers his clients is an immediate needs annuity, bought through equity release. He feels this, at the moment, is the most palatable option for those with the means to pay for care, but wanting to ring-fence their estate for relatives to inherit.

A no surprises product

Cox says: “With an immediate needs annuity, the client, because they are paying upfront, will have no surprises. If they take out the appropriate equity release product you can protect some of the capital in their property.”

With the average immediate needs annuity costing more than £80,000, the only way some families can pay is through equity release, Cox says.

He adds: “The only problem is equity release, in particular lifetime mortgages, is not such a competitive market; several big providers have pulled out.”

A product combining equity release and an immediate needs annuity is one potential solution; another might be to remove the LTC element altogether. One provider is suggesting clients use a critical illness pay-out from its whole-of-life insurance cover to pay for care.

Scottish Provident has a retirement option on its whole-of-life insurance it claims could be used to pay out for LTC. Jennifer Gilchrist, group product development manager, says: “The retirement option gives a client critical illness cover, but when they come up to retirement it narrows the number of illnesses down to six.”

Gilchrist says reducing the number of specified illnesses to those more appropriate to the age of older clients – such as dementia – means they are offered a more affordable policy which, via a lump sum, could pay out for LTC.

But advisers such as Faye and Cox believe any product with an LTC needs to be aimed specifically at that market. Faye says: “What we need are more advisers qualified to sell LTC and more products that are aimed at the LTC market. That is why the qualifications were introduced. LTC comes with other unique issues, which means it cannot be sold like a pension.”

In fact, pensions might offer another solution. In its submission to the ABI as part of the Government’s green paper consultation, Legal & General suggests using  pension annuities to pay for LTC.

Tim Gosden, head of annuity product development, says there could be a way to pay for LTC if the rules were changed around annuity value protection. At the moment, the lump sum is paid out only on death before age 75.

Gosden says: “We are suggesting the removal of the age 75 rule to be able pay the lump sum earlier if the annuitant requires care, measured by failing activities of daily living.”

So, instead of providing what for many is a minor income (a £50,000 fund equals an annuity of £3,000 per year) the pension annuity fund could be released as a lump sum to pay for care. Gosden admits the idea may need refining. “But for many it could be a real godsend.”

Whatever ideas the industry comes up with, there is one big obstacle remaining. Cox says: “The answer to any LTC solution will ultimately lie with any future government.” Until then, he says the LTC industry will remain in limbo.