The future of long term care funding is a hot political potato. And while the politicians grapple with the problem, opinion is firmly divided on the likelihood of increasing the sales of long term care products and the best way to achieve an upturn in the industry.
Long term care is criticised as being an elitist policy, prohibitively expensive and difficult to sell. Proponents cite the vast potential market waiting to be exploited.
Estimates suggest the number of long term care policy holders ranges from 20,000 to 30,000, a relatively small amount compared to the success of schemes like individual critical illness.
A recent survey by Swiss Re Life and Health also showed some disappointing results. Only a small proportion of respondents expressed keen interest in a long term care plan, and the target age group of 45-60-year olds were the least intrigued. But while lack of public awareness is thought by many to be the key to poor performance of long term care cover, the cost of elderly nursing, especially maintaining round the clock supervision, is not something everyone wants to confront.
Yet it is said one in five people will eventually need some kind of long term care provision – with strong financial implications.
The average price of 24-hour nursing is £500 per week, amounting to £25,000 a year. Nursing home weekly fees run to about £350, the equivalent of an annual cost of £17,000.
In the November 1995 budget, the thresholds above which people became ineligible for social security benefits were raised to £16,000. And although the level of assets at which people make no contribution to their long term care was also raised – to £ 10,000 – the responsibility still falls on almost all individuals that own their own homes.
It is estimated that 40,000 homes are sold every year to pay for long term care. However, Peter Fisher, partner in Oxford-based residential care specialists, Nursing Home Fees Agency, points out statistics can be used as a means of supporting any theory. But, whatever the truth, people need to be encouraged to pay a visit to their financial advisor rather than to their estate agent if a solution to long term care funding is to be addressed.
Nursing Home Fees Agency is rapidly building up a reputation for providing quality advice. Social Services have dubbed it “Robin Hood” as it offers a free advisory service, raising revenue via commissions from those who choose to buy long term care plans. Partners Philip Spiers and Peter Fisher fiercely advocate the vital part specialist advice plays in selling long term care.
“ We are an accountancy practice but we started having relatives of our clients asking more and more questions about the best way to pay for long term care and what they were entitled to from the state.
“Our research showed that people in nursing homes ran out of money and that income support didn’t cover the shortfall. It became clear that if people had had the right advice at the outset, they wouldn’t be in that position,” explains Spiers.
Sandy Johnstone, long term care development manager at Commercial Union, agrees: “I think it is also important to stress the value of the claims service which we offer through Grace Consulting, specialists in the provision of independent care advice. The availability of independent advice at the point of claim is an element that is missing in providing advice for long term care customers. People need to be told before they buy what to do if they make a claim. If it can’t be spelt out, the idea of buying a policy falls apart,” he says.
Since its launch in 1996, Nursing Home Fees Agency has doubled its business every year, primarily due to referrals from such diverse agencies as Age Concern, Princess Royal Trust and West Sussex social services. Last February alone saw 1,500 enquiries.
Spiers is a supporter of the immediate needs plans for those people who may be in their 80s and have no other way of looking after themselves.
PPP and Norwich Union Healthcare are just two of the providers who offer this type of policy, called Immediate Lifetime Care and Immediate Care respectively. These schemes mean the customer can make a single lump payment or separate instalments, usually derived from the sale of their house, and receive care for life. The remainder of the proceeds from the property sale is then protected.
However, Spiers is critical of certain aspects of home income and home reversion plans, a little-used method of financing care, which he believes are often sold negligently.
Carlyle Life would disagree. The company is a member of the voluntary Safe Home Income Plans scheme, which ensures it provides a fair, simple and complete description of its plan.
Carlyle deals specifically with two types of home income plans, sometimes known as equity release. Its mortgage home income plan provides a mortgage advance to enable applicants to purchase an annuity from the company and the loan is secured on the claimant’s property. The interest rate charged is fixed at 8.25%. The interest charged is deducted from the annuity and the clients benefit from the balance of the annuity paid to them.
The reversion scheme means the company provides a home owner with an annuity guaranteed for life in return for an interest in the property of between 30% and 95%. Lyn Casling, general manager, says around 10% of his clients buy the annuity so they can afford to pay for nursing home fees.
Spiers’s gripe with these types of plans is twofold: “Let’s say a couple who are in.their 80s have a modest income which they want to boost. They maybe entitled to income support which they may lose if they purchase a home income plan. Furthermore, if one of the couple goes into care and their only asset is their property, it normally can’t be touched. If they have released capital, they may have to use some of it to provide care for the spouse. It’s all down to having highly misleading advice.”
John Quin, associate director ofSurrey-based IFA, C R Toogood (Financial Services), has similar reservations about investment bond products. Cover through investment bonds allows individuals to invest capital in a number of investment funds. When the policyholder requires care, the value of the bond, including the increases from investment, are used to pay for care. His main concern is the terms of the contracts. He thinks they are not explicit enough about what the customer is likely to get returned.
PPP offers a lifetime care bond which is investment linked, as does Scottish Amicable European. It is Quin’s contention that the long term care payment takes up most of the investment bond and the plan’s definitions are far too cloudy for most people to decipher.
IFAs may like to consider recommending the Bank of Scotland’s Shared Appreciation Mortgage (SAM) to clients who want to raise a lump sum without having to make repayments. For those people who are asset rich and cash poor, this kind of mortgage offers a solution.
Quin gives an example: “If your property does not have a mortgage the Bank of Scotland will lend up to 25% of the value, e.g. house value £100,000, bank will lend £25,000. You do not have to make any repayments. When you die or the house is sold, the Bank of Scotland will be repaid £25,000, plus 75% of the increased equity at the point of sale.”
Whereas schemes such as home income plans, investment bonds and SAM’s provide an alternative solution to funding than the traditional standard loan contracts, perhaps a totally different approach is needed to kick-start the market.
Lynda Cox, life marketing manager at Skandia Life, favours a scheme put forward by the Joseph Rowntree Foundation in September 1996. The principal of the scheme was to provide insured care with a means tested hotel charge for accommodation.
“In a world that isn’t fair, this is a pretty fair solution. For instance, why should I expect the state to pay for my daily living expenses when I would be paying for them myself if I received care at home?” she asks.
The eagerly-awaited outcome of the Royal Commission on the funding of long term care may provide the industry with new solutions to old problems. But not everyone is optimistic about the report’s conclusions. The consensus seems to be the results will merely end a prolonged period of uncertainty about the future of long term care. It may well be up to the private sector to find all the answers.