The need for long-term care and how it should be paid for is arguably one of the greatest causes for concern among our growing elderly population. Almost half a million people are now in residential care homes, nursing homes and long stay hospitals.
Insurance for long-term care means that you pay (either in premiums or a lump sum) for your provider to take care of costs for you. State provision is currently very complicated and typically only assists people once their personal assets have fallen below a certain level. The level of help also varies from one local authority to another.
Covering long-term care costs
There are a number of ways of paying for long-term care. This can be directly from income or out of assets including selling the family home or releasing equity from it. There are three main ways of covering long-term care costs: insurance-based solutions, annuity or the state.
Risk-based plans, which may be funded by single or regular premiums, pay up to a pre-determined monthly limit – usually until the policyholder dies or the care is no longer needed.
Benefit payments are triggered when you are judged to be incapable of performing an agreed number of ‘activities of daily life’ such as washing, dressing or feeding yourself and moving from room to room. Payment of benefits starts after a ‘waiting period’, which varies from policy to policy.
The cost of the policy depends on:
age, sex and state of health when the policy is taken out;
the level of benefit;
the number of ‘activities of daily life’ you are unable to perform before you can claim;
the waiting period.
Immediate care plans
Immediate care plans are enhanced annuity products with higher payments than conventional annuities due to the lower life expectancy of the plan holder. This means that you pay a single lump sum in return for regular payments, either to yourself or the care provider. They are bought by people already in care or about to need care.
Under the terms of an immediate care plan, the provider pays you a guaranteed income for the rest of your life, which is used to pay long-term care costs. Each annuity is individually underwritten and quotations vary widely from provider to provider depending on their actuaries’ views of your life expectancy. Typically you either choose to have your payments start straight away or defer them for up to five years. Choosing a deferred period is more cost effective and caters for those who can fund their care needs in the interim.
The payment is made up of taxable interest and a tax-free ‘return of capital’ element. The lower your life expectancy, the higher the return of capital element and the total level of benefit received. If the income is paid directly to the care provider, it is entirely free of tax.
It is also possible to guarantee payments for a minimum period of time (six months to five years), even if the annuitant dies in the interim, or link benefits to inflation – although such safeguards reduce the income yield on the annuity.
State cover for long-term care costs
The extent of state cover for long-term care costs varies between across the U.K – although it is always means tested.
In England, Wales and Northern Ireland, means testing is used to agree how much of a personal contribution is required towards the cost of care. This is done by tariffs.
In Scotland, the payments are split between the NHS and the local authority Residents of care homes can apply for either or both benefits according to eligibility – also assessed by means testing.
In January 2011 the UK government froze the capital threshold limits for means-tested care, and is not planning to look at this again until the next local government finance review in autumn 2012.
However, you will have to pay for care if your combined assets are currently greater than:
People in receipt of state help for long-term costs must pay their occupational and state pensions and any benefits to the local authority. Certain categories of income, such as income from savings, are disregarded. Other categories, like pension income that is paid to a spouse not living in the same residential or nursing home, are partially disregarded.
Relevant assets include cash deposits, investments, bonds, premium bonds, National Savings, shares, unit trusts, property and the family home (unless a spouse or dependent occupies the property).
The family home is disregarded for 12 weeks before it is taken into account for means-testing. It may also be possible to enter into a ‘deferred agreement’ with the local authority to allow it to recoup an outstanding debt at a later date, although these are rarely granted.
The care recipient can keep a personal expense allowance (PEA), which is disregarded for means-testing.