The consultation period on the Treasury's proposals for regulating long-term care insurance is drawing to a close. No other form of insurance has been recommended for regulation by the FSA but LTC insurance is being treated as a special case.
In part, this is because elderly consumers are considered to be particularly vulnerable but there are other compelling reasons which I feel need to be addressed.
Lifetime Care supports option three, which would give the FSA the power to regulate both the selling and marketing of LTCI. This is also the Government's preferred option. Quoting from our response to the consultation paper, the Lifetime Care argument goes as follows:
a: LTC is complex both in terms of funding and delivery. Insurance contracts can involve tens of thousands of pounds of investment. As a result, advisers should be licensed through an appropriate training and competency scheme subject to regulatory scrutiny.
b: The potential size of investments is just as high, if not higher, than in standard investment contracts which are already subject to full conduct of business rules.
c: LTC funding should form part of the advice for retirement planning and estate preservation for inheritance. Whereas most of the advice required in these two areas would be regulated, the advice relating to LTC funding would not be regulated, leading to consumer misunderstanding.
d: When coming to terms with the need for LTC, possibly for the rest of an individual's life, the consumer and his or her family may be very vulnerable. Regulatory protection is crucial when financial advice is being given on immediate needs contracts at such traumatic times.
Current investment-linked products in the market offer a mix of LTC insurance benefits and investment benefits within the same long-term insurance contract. Any advice given relating to investment benefits is regulated, whereas the advice given about LTC benefits is not. Yet the LTC benefits could easily be far bigger and more important to the consumer than the investment benefits.
In our view, advice on dealing with the risk of potential LTC costs is integral to planning for retirement income and estate protection. However, of these three areas, only LTC advice remains unregulated and the cost of care can completely undermine the best laid plans for retirement and inheritance.
This case study illustrates my point. You cannot beat reality and the questions here were posed by an IFA who came to us during a review of this family's options.
A female client aged 75 is concerned about the costs of LTC. Her husband died about a year ago. None of her family lives nearby and she finds travelling to see them more and more difficult. Although she is still in reasonably good health, she is aware that she is not as mobile or active as she was just a couple of years ago.
A close neighbour has just had to move into a residential care home and the client is worried about her own future as well as the potential erosion of the inheritance she wants to leave to her children and grandchildren.
Both of her daughters live in South London and they have agreed it would be best if she could move closer to them. Between them, they have found a flat she can afford. The value of the flat is around £170,000.
The client's estate in total is worth £450,000. Property values in London are soaring and both the client and her daughters are confident that in a short time its value will be higher, making the IHT problem even worse.
Her daughters have suggested that she should give them enough cash (from the sale of her existing home and other savings) to buy the flat in their own names, with their mother living rent-free in the flat for the rest of her life.
In addition, they have heard of estate planning bonds which can also help to protect assets from IHT and think that their mother should invest some of her remaining capital in such an arrangement. The daughters believe these arrangements will:
a: Save potential inheritance tax in the long term.
b: Enable their mother to qualify for local authority support more quickly for LTC costs because the flat and the estate planning bond will not count as her assets for the means test.
Our IFA has been asked by the client to comment on the arrangements suggested by her daughters and advise on how best she can protect her assets from inheritance tax while ensuring she can choose the care she wants if it is needed.
This is not an untypical financial problem involving a combination of LTC and estate plan ning. It also highlights a common misconception that as long as assets have been legally transferred to children or grandchildren, the local authority will pick up the care bill.
To give proper advice, it will require a sound knowledge of:
IHT and IHT mitigation products.
Capital gains tax.
Local authority means-testing rules for funding residential LTC services.
The type of LTC insurance benefit required and the best way to structure the contract if this is felt to be the appropriate solution.
Part of the advice will certainly be regulated and fall within the “full conduct of business” rules. But the part relating to LTC insurance benefits and the insurance contract would not be regulated. Would the client be aware of this? Almost certainly not. We believe it makes sense for those advising on LTC to have the knowledge necessary to pass the Chartered Insurance Institute's advanced financial planning paper G80, especially if they are advising a consumer on an immediate needs product.
Statutory regulation of LTC insurance will eliminate a number of important anomalies and offer the sort of regulatory protection that consumers already expect with other financial products. Cat standards are a good start but regulation has to be the answer for this particular form of insurance.