May 2008

Long-term provision

As Britain's population ages, an increasing number of families have to make very difficult decisions about their loved one's long-term care. According to our recent survey of over 2,000 people, more than a third (37%) of British adults over 50 have had to put a relative into residential care - a figure which will continue to grow in line with increasing life expectancy.

Our research also showed, however, that an alarming proportion of people are not making informed decisions about care for their loved ones: 43% did not seek any advice when choosing between funding options for residential care. This has profound implications for the future, especially as care home costs continue to rise (full-time nursing home care costs around £25,000 to £30,000 or more a year) and funding from local authorities is progressively cut. The future many families may face is one in which they have to eat into their savings or sell the family home to fund care.

Facing grave futures

It's just as clear that the industry - financial advisers and product providers in particular - needs to help people seek adequate advice. With current economic uncertainty and an increasing likelihood that people will outlive their savings, families are facing a grave financial future. This situation is compounded by the fact that, with lessening government support, more people will be expected to fend for themselves rather than rely on local authority funding. Longevity and investment risks are therefore at least equally important considerations to raise when IFAs advise people on personal provision of long-term care funding.

But it's not all bad news: it is true that many families may have, or be able, to make investments which can last the distance of 'average' long-term care. However, hidden behind this average is a financial risk individual families should not have to tackle on their own. Just how long is someone going to live? If an elderly relative lives for longer than the average, then the estate can be eroded, and a family's capital can be whittled down to nothing very quickly.

An ideal solution to this conundrum is to transfer the investment and longevity risks to a third party insurer and protect a person's income. (While investment risk tools are well developed, the same can't be said for longevity risk tools, and providers obviously have a spread of risk that individual families cannot match.) Fitting this ideal is an immediate needs annuity (ina) also known as an immediate care plan (ICP). An INA 'ring-fences' care costs and brings certainty and peace of mind to all parties by providing a guaranteed income for life. Options such as capital protection or deferred annuities are also available to suit the individual circumstances and requirements of each person and escalation or RPI can be applied to meet fee increases each year.

A major stumbling block when it comes to providing information on long-term care is it is a highly complex area. The flipside of this, however, is that having adequate knowledge of entitlements, funding options and the whole gamut of costs associated with care homes is invaluable to people. Similarly, advisers able to take people through the myriad options, help them anticipate and plan for ongoing long-term care costs, and find the best financial solution, are a rare commodity. We need more advisers to take the CF8 exam!

Even for the CF8-qualified adviser, the menu of long-term care funding options can be perplexing. But it is surely worth the investment of time and energy to make sense of this area. After all, this is still effectively an untapped market.

According to the Wanless Report the market for private long-term care is around £3.5 billion and rising. Compare this with the scant 1200 (representing only £92m in premiums) long-term care annuity products sold in 2006. There is clearly an unrealised opportunity for IFAs and providers to meet the challenge of increasing longevity.

A happy ending to long-term care?

Making decisions about the long-term care options of a beloved relative can be a frightening and confusing time for all concerned. Indeed, a recent Commission for Social Care Inspection (CSCI) report stated that, among other issues with information on long-term care, there is a lack of clarity about what happens if the money runs out. At such a tough emotional time the need for specialist financial advice and information is vital.

Graham Duffy
Long Term Care Manager
Partnership Assurance