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Age concerns

Advisers who help clients plan for long-term care costs face a number of challenges.

Apart from the high costs involved, there are also uncertainties over timing and what state benefits might be available into the future and, to some extent, the lack of long-tern care products to choose from.

Both the annual costs associated with getting older and the amount of time individuals spend in old age are rising. Government projections show the number of people aged 85 and over will quadruple from around 1.2 million in 2006 to 4.9 million by 2051. Research from Saga indicates that the future average cost of a four year stay in a care home is set to double from £112,312 to £223,476 in the next 20 years.

Under the current system, state spending on long-term care would need to double just to keep up with rising demand. The Government is undertaking a review of long-term care funding but the consensus is that the current system is unsustainable and the solutions to the longevity problem are likely to look at mechanisms for people funding their own care.

Some long-term care experts believe that a key part of the discussions over the future of funding should be product development.

Current LTC product options centre on a limited choice of pre-funded insurance long-term care insurance plans and protection add-ons, with most advice on long-term care funding products likely to focus on buying an annuity to pay for care that needed here and now.

Looking first at the protection options, critical illness plans pay out a lump sum on conditions that could trigger the need for long-term care but there are problems with the practicalities of using standard CI products.

Informed Choice joint managing director Martin Bamford says: “Critical-illness insurance typically gets more expensive as you get older and someone needing long-term care does not tend to be driven by catastrophic events. It is more of a gradual decline where people are slowly unable to do the normal activities of daily living and need support.”

Bright Grey used to offer a long-term care insurance add-on to its income protection product but this was thwarted by changes in the regulation of long-term care products.

Bright Grey product director Roger Edwards says: “We had a product feature where the income protection policy could change into a long-term care product when the person reached 65. The cost of the add-on was negligible for those taking out income protection with the long-term care add-on in their 30s.

“However, when the FSA and Government rejigged the rules to demand exams to advise on LTC policies, anyone selling our type of income protection plan with the LTC add-on would need to be qualified to do so.”

After some protracted discussions with regulators, Bright Grey removed the LTC add-on and the market lost this innovative pre-funding option.

Within the current rules, there are products that have some flexibility for use to fund long-term care. Lincoln’s Elderly Care Benefit, for example, can provide a lump sum which could be used to fund elderly care but it is not designed or classed as a long-term care product as defined by the FSA.

Sesame has the product on its panel in March of this year and protection research manager Dale Tranter highlights the restrictions which are faced by IFAs and their clients. He says: “Lincoln’s elderly care benefit provides advisers with further options and flexibility at a time of limited product choice and when the UK population is ageing and age-related diseases are becoming more prevalent.”

Last year, Dr Marius Barnard, a pioneer critical-illness cover, called on the protection industry to instigate a resurgence of long-term care insurance products. Dr Barnard said, due to the UK’s aging population, long-term care will be the key product in the coming years.

“Long-term care is the protection product that is needed more than anything else and I appeal to the big companies to resurge this product. It is the product of the future,” he said.

Big insurers have not responded by entering or rejoining the pre-funded LTC insurance market. The outcome of the Government’s consultation will not be clear for possibly several years.

In the current key product areas, advisers are clear on the need for more competition. Bamford says: “There is a very small market for immediate needs annuities and an even more limited pre-funded niche market. There are simply not enough providers.”

One of the few companies to offer long-term care insurance is Partnership Assurance but long-term care manager Graham Duffy believes this will change and is confident that more providers and continued product innovation will come to characterise the LTC market in the coming years.

He points to the introduction of the Later Life accreditation for advisers and the establishment of the Society of Later Life Advisers as an indication of a new determination among the industry to move long-term care planning up the agenda. He says: “The Later Life concept has to grow as the demographics mean only those without any assets can expect state help and those with assets will need to fund their care privately.

“All the signs are that long-term care is set to grow and see new innovation. Insurers are increasingly looking to insure people against dying early, but also insuring against longevity.”

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