Long-Term Care
Long-Term Care
Long-Term Care (LTC) is a relatively new concept in the UK due in part to the changes in society. Previous generations would often care for an elderly relative, however in modern times individuals are more geographically mobile and have often moved away from their families as a result of their careers, and it is therefore no longer possible for them to care for elderly relatives.
In addition, life expectancy has increased, which in turn puts a greater strain on the standard of care that state support can provide.
The cost of long-term care will vary greatly between care homes and the level of care that is required. A typical care home could charge £500 per week, with the cost rising to £1,000 plus per week for 24/7 nursing care or specialist care.
When an individual reaches the stage that they require long-term care, this does not necessarily mean that their life expectancy becomes reduced. The required care could last for 15 years or more, and therefore incurs considerable costs.
Taking these points into consideration, and the fact that it is unknown as to what state assistance will be available in the future, many people have decided to take control of the needs they may well require at a later date.
There are two types of long-term care insurance products, pre-funded insurance and immediate care insurance.
Pre-Funded Insurance
A lump sum or regular premium paid in advance, on the basis that maybe one day in the future, the policy will pay out in order to cover some, or all the costs associated to long-term care. The benefit will become payable when the insured is unable to carry out a certain number of activities of daily living (ADLs).
ADLs will vary between providers, but typically they will include;
- Preparing food
- Moving from room to room
- Washing
- Continence
- Dressing
- Toileting
- Feeding
Low cost plans are often available. These will tend to pay out if the insured is permanently unable to carry out three or more ADLs. With a budget plan the policy will normally have a deferred period, whereby the insured will be incapable of performing these ADLs for a set time frame (e.g. 3 months), before benefit will become payable.
More expensive alternatives are available. The increased costs mean less restrictions, such as the benefit being payable if the insured is unable to carry out two or more ADLs instead of three.
These type of plans are pure insurance contracts, which will require underwriting at the start of the plan. They will often have a guaranteed premium for five or ten years, at which point they will be reviewed, and could potentially rise. They have an unlimited benefit period, but they will have a maximum sum of benefit paid annually.
The benefits payable from this type of plan are tax free. The policies do not have surrender values. Most contracts also have exclusions applied, for example if the insured is unable to carry out ADLs due to alcohol or drug abuse, then the benefit will not be paid.
The above mentioned long-term care policies are pure insurance based, but it also possible to take out a pre-funded insurance plan which is investment based.
With this type of plan, a lump sum will be invested into a unit linked fund. Each month, out of the investment, a premium is deducted by cancelling units to pay for the cover insurance premium. The policy will then pay out on a valid claim. Alternatively if the insured dies, then the value of the remaining units will be paid out.
The plan will usually assume investment growth at a specified rate in order to cover the premiums. Therefore poor investment performance could lead to a reduction of cover, or the requirement for increased investment.
Immediate Care Insurance
For individuals who are in a position where they already need long-term care but have not previously arranged a policy for this need. A lump sum is paid in return for guaranteed future payments towards the cost of care, for as long as is required. This type of policy is usually referred to as an annuity.
If the insured makes a recovery, the benefit will continue to be paid, however if the insured dies prematurely then the capital lump sum paid for the annuity would be lost in its entirety.
The benefit that is payable will in part be treated as a return of capital and therefore will be tax free. However the remaining part of the benefit will be taxed as savings income.
There are a number of non-insurance provisions that might be considered when planning for long-term care. These alternatives could include utilising savings accumulated throughout life to fund the required care needed, releasing money from the home by various methods, such as equity release.