If you knew nothing about financial services and were asked to draw up a specification for your idea of a perfect product, it might look something like this.
It would be a relatively new idea yet proven, sell into a market that is growing, to people who could afford it, and where the alternatives are not very attractive. It could be funded from either capital or income, offering tax breaks as well as protection, and a valued service as well as financial benefits. It would be called long term care insurance.
So why did total sales last year fail to break through the 10,000 barrier when, at the other extreme, critical illness sales were over half a million new policies?
That is the paradox and the fact that the likes of Scottish Widows, Permanent Insurance and Norwich Union all entered the market in 1997 and that others are poised to do so in 1998 indicates a growing belief in the sector.
But, with both PPP lifetime care – the market leader – and BUPA cutting back their long term care direct salesforces, there are indications that all may not be well in the fledgling market.
In 1991 Commercial Union introduced the first pre-funded plan under its Third Age banner. The basic idea, paying a single or regular premium in return for a monthly payment in the event of the client needing long term care, still forms the backbone to the market.
CU were followed, by PPP lifetime care deciding to specialise in the market and PPP became the first insurer to pay a long term care claim in 1994.
Today, insurers offer pure protection plans, with little or no return on death, investment linked plans – often written offshore to secure tax benefits – and immediate care plans, for those already in need of care. A dozen or so insurers make up the market and there is also a thriving IFA lobby group – IFACare, as well as an industry wide one, the Continuing Care Conference.
According to analysts Laing & Buisson there are almost half a million people in residential or nursing homes and it costs, on average, £247 a week to stay in a residential home and £336 in a nursing home where medical cover is available around the clock.
While the risk of needing care is only 1% at retirement age, it rapidly rises to around 1 in 4 at age 85 and over. In other words, perhaps a quarter to a fifth of those now aged 65 are likely to need care at some stage in the future.
There are at present just over a million people aged 85 or over in the UK. Within three years this will have grown by 15% and will reach 2.8m by 2055. The potential market is growing and with more people retiring on pensions and an investment portfolio and, likely as not, living in their own home, more have the means to be able to fund long term care insurance.
Sandy Johnstone, Commercial Union’s long term care development manager sees long term care as being inexorably linked with retirement planning, which he sees as involving four elements: a pension; managing investment assets; reconstructing income – including converting investments previously held for growth to now maximising income, and planning for disability in retirement. The latter need is met by long term care cover.
The long term care market splits broadly into three parts with the largest group made up of pre-funded plans, where the policy is started before the need for care arises.
Payment is usually made on failing a number of activities of daily living. These may include washing, bathing, feeding and continence. Benefit is also paid if the claimant is cognitively impaired, as in Alzheimer’s disease.
As well as financial benefits, most insurers offer a complementary care service-whether at home or in residential care. Helplines may also be available.
Table 1 (overleaf) shows the main companies offering pre-funded plans. The table indicates just the main products available. Many have a range of options to meet particular needs. Generally, the market splits into protection only plans that have no surrender value, although a limited paid-up or death payment may be made, and investment linked plans.
Investment linked plans, where the market is led by Scottish Amicable European, are usually offshore bonds, although PPP with its Lifetime Care Bond offers a similar benefit by using an onshore PHI fund which also pays no tax.
Part of the appeal is that they offer a return on death or surrender and, through the use of trusts, Inheritance Tax mitigation may also be available. The downside is that they are often subject to a high minimum premium – £10,000 or even £20,000 is not unusual.
The second market is in immediate care plans. These are usually annuities or work in the same way as an annuity, are funded by a lump sum and in return the insurer pays a monthly payment until death.
As the name implies, such plans are only taken out once the client is in need of care (see Table 2) Such plans are not for the unwary. Although superficially an easy way into the market – clients and their families hardly need persuading of the possibility of needing care – medical evidence will be required and the quotation offered maybe little better than a conventional annuity would offer. This is especially true where life expectancy is little.
Not to be confused with the very dubious 1980s practice of mortgaging a home to invest in equities, such plans are mortgages where the proceeds are usually invested into an annuity.
The annuity in turn pays the loan leaving a surplus that can boost retirement income or be invested into long term care.
As any tax relief on the mortgage is limited to loans of £30,000, the mathematics are such that plans usually only work for those in their late 60s or older. Some of the main players are shown in Table 3.
Insurers believe that IFAs are now well placed to take advantage of the growing market.
Norwich Union has been pleased with the initial response of IFAs to its plan, early indications being that interest is across the product range. “For a man aged 60, £12,000 a year of benefits can cost from just £60 a month which is less than many people fear,” comments NU’s long term care marketing manager, Hywel Jones.
Most plans sell to people in their late 60s and early 70s. BUPA’s typical client is aged 67 on their regular premium plans and 70 on single premiums according to market development manager Andy Sampson. But the trend is towards younger people too. Scottish Amicable International sales and marketing director David Evans reports that its average age has fallen recently from 67 to around 64. For most IFAs the starting point is likely to be clients in their late 60s. Traditionally these have been single women – often widows – many with a professional background.
Evans believes `baby boomers’ in their 40s should be targeted too. He points out that if their parents need care they maybe faced with problems too. First, any inheritance they expected could be reduced by the cost of care. If care is provided at home –which four out of five prefer – and with most carers being aged 45-64, caring for an elderly relative may also mean loss of independence and loss of income.
Although most plans are not regulated under the Financial Services Act, most insurers now treat them as though they were. Home income type plans also require the intermediary to hold a consumer credit licence.
Over the next few months more insurers are likely to enter the market. Both Scottish Provident and General Accident are contenders and unlikely to be the last.