Only a small number of IFAs and brokers have so far been tempted to dip their toes into the long term care market. The number of policyholders is small, no more than 30,000, and many intermediaries have decided their time and energy can be better invested elsewhere.
This reluctance is understandable, but may be increasingly misguided as the market gears itself up for major growth.
The majority of long term care policies have been sold in the last 18 months, and some of the more optimistic insurance companies have even talked of 250,000 policies in place come the millennium.
Of course insurers are happy to talk up the potential market, but a wave of new entrants suggests they are backing their words with action.
Last year Norwich Union, Royal Skandia and Permanent Insurance launched long term care products, and Scottish Provident and General Accident are taking the plunge in 1998.
One of the reasons sales of long term care cover have so far been lethargic is uncertainty over the State’s role in funding elderly care. The Conservatives spent a long time reviewing the options, and last December the Labour Government announced a Royal Commission on long term care, which, if it meets its 12-month deadline, should be reporting at the end of the year. The temptation for both customers and IFAs has been to sit tight and wait for the picture to become more clear before committing to a policy.
There now seems little advantage in this. Anybody who thinks state funding for residential care is likely to increase is in for a shock. Whatever the commission recommends, the consensus is the Treasury will not be footing the bill, and some form of insurance will remain necessary for clients wishing to guarantee quality care and protect their assets. In fact, the commission is likely to give a major boost to sales of long term care products.
IFAs still uncertain about the future should note that both BUPA and PPP Lifetime Care have felt sufficiently confident to guarantee current customers that, whatever the report says, they will not be disadvantaged. Lynda Cox, life marketing manager for Royal Skandia, believes a partnership where the individual pays accommodation costs, with the state paying for nursing care, is the most likely to form the basis for new proposals, with accommodation costs subject to a means test.
There are other options, such as compulsion or a national insurance type levy, but these are unlikely. There are a whole load of insurance policies that would be good for people to have, so why on earth should long term care be compulsory when others are not? “I think it would be pretty low down the list,” she says.
The commission will put the onus on individuals to take action to protect their assets from being ravaged by care costs. “Lack of local authority funding means that IFAs’ clients with even modest savings shouldn’t be sitting and waiting for the Royal Commission to pronounce. A number of people still think they will be handed something on a plate and that is so naive,” says Cox.
“If you’ve got a client with a reasonable level of pension, an unmortgaged house, perhaps living alone, just retired, they should be thinking about long term care insurance. They have got assets that mean they will fail a means test and the State won’t be coming up with a bean. They may have to sell their house and buy their own care which means passing little or nothing onto their children. If IFAs don’t raise this they could face problems a few years down the line if clients run into difficulties and say you could have done something about this,” she adds.
The speed at which care costs can erode people’s savings is frightening. The annual cost of receiving care in your own home can rise to £30,000, with care in a nursing home costing an average £17,800 a year. Local authorities will pay a proportion of care costs for people with less than £16,000 assets, and will cover all costs for those with assets of less than £10,000.
Since the average home is worth £73,000, that rules out almost every homeowner. Every year 40,000 homes worth a total of £3 billion are sold to meet care costs.
The majority of IFAs will protect clients against inheritance tax, yet this only affects assets over £200,000. There are more benefits to clients from long term care than asset protection, says Roger Edwards, product marketing manager with Scottish Provident, which is to enter the market shortly. “Our research among the main target markets for IFAs, socio-economic classes A and B, suggests that while asset protection is important, that is a happy secondary effect after making sure high quality care is offered. The first aim of taking out a policy is to ensure clients receive care that allows them to retain as much independence and dignity as possible,” he says.
The uncertainty over Government plans is only one of the reasons long term care sales have failed to take off, Edwards says. “It is a new form of insurance. This is the sort of product you couldn’t sell through Virgin Direct. It is certainly an advice product that has quite a long selling process, not something that could be sold over a couple of days, but demands a lot of thought and time. One problem is that the man on the street still doesn’t see that much difference between permanent health insurance, life and long term care cover and all the other protection products. IFAs and insurers need to make these sorts of products a lot more understandable to the public.”
Edwards says IFAs who specialise in retirement and investment planning should be learning about long term care. “If somebody had £100,000 to invest on retirement then instead of putting it all into unit trusts or bonds you may argue that £15,000 or £20,000 could be invested into long term care to give them the added protection.”
Andy Holtham, head of long term care development at General Accident, which hopes to enter the market before the summer, says IFAs would be wise to add long term care to their armoury. “While there is as yet no definite role for IFAs in Independent Saving Accounts or Stakeholder pensions, long term care insurance is a natural product for them to advise on as it has a lot of complex elements involved, explaining benefits, advising on how much cover to take out and how the claims criteria works.”
He warns that IFAs getting involved in long term care must learn not only about the products themselves, but also the law regarding areas such as transfer of assets, for example.
Local authorities are required by law to assess people’s ability to pay for their own care, and clients who knowingly give away assets such as income, home or savings, or sell them at less than market value, could be seen as deliberately depriving themselves to qualify for free care and be forced to pay anyway.
The law is complex and must be studied carefully, says Hywel Jones, marketing manager for long term care with Norwich Union, which provides CD-ROMs and videos to help educate IFAs on this market. He says IFAs will soon have little choice over learning about long term care.
“If they are not advising clients about this at retirement then they have to ask themselves serious questions. With the growing number of major companies getting behind the market, more IFAs are encouraged to get involved. The majority are picking this up quickly and with a lot of confidence. Everybody can see the same demographic figures and the same State funding problems and put two and two together and say yes there is a market.”
Jones says long term care is not yet regulated, but regulation will inevitably come.
Andy Sampson, marketing development manager with BUPA, says there is a potential market of 500,000 customers. BUPA launched its plan in 1996 and Sampson predicts steady but unspectacular growth across the market over the next five years of around 50%. He recognises that many IFAs have been concerned that learning about long term care will tangle them in complex care issues, but argues that once the policy is sold, these become the responsibility of the insurers rather than the IFA. He says that most IFAs who have taken the plunge have been self taught, but he says more educational material is now becoming available.
Long term care is one of the great unthinkable subjects. Few people like to picture themselves spending their declining years in a nursing or residential home, let alone pay a monthly premium to meet that possibility. But as the welfare state retreats on all fronts, it will be increasingly hard for IFAs, or the wider public, to turn a blind eye to long term care.