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Means of life

Talking to advisers active in the field of long-term care, there is often uncertainty as to whether the definition of life insurance for the purpose of the local authority means test includes an investment bond. Indeed, some local authorities have sought to take investment bonds into account as assessable assets despite the fact that, strictly speaking, most investment bonds (other than capital redemption policies) are life insurance policies. Some welcome clarification has now been obtained in this area.

A revised version of the Charging for Residential Accommodation Guide was published on October 6, 2003. The guide, known as Crag, provides guidelines for local authority assessors who decide whether, and to what extent, individuals who are provided with residential accommodation by the local authority must make a contribution.

The purpose of this means test is to establish the amount of assessable capital that an individual has, the assets which must be taken into account and those that have to be disregarded. One of the assets which is to be disregarded under the means test is “the surrender value of any policy of life insurance”.

The new version of Crag makes it clear that the practice of taking into account the surrender value of life insurance investment bonds is not acceptable and has always been an unlawful practice. Any capital assessments which took account of such assets should be brought to the attention of the relevant local authority with a view to obtaining a refund of homecare fees incorrectly paid as a result.

It may be useful to specifically quote some of the statements from Crag. Paragraph 6.002B states: “Councils are advised that if an investment bond is written as one or more life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights has to be disregarded as a capital asset in the financial assessment for residential accommodation…In contrast, the surrender value of an investment bond without life insurance is taken into account.”

Paragraph 6.002C states: “Income from investment bonds, with or without life insurance, is taken into account in the financial assessment for residential accommodation. Actual payments of capital by periodic instalments from investment bonds, with or without life insurance, are treated as income and taken into account provided that such payments are outstanding on the first day that the resident becomes liable to pay for his or her accommodation and the aggregate of the outstanding instalment, and any other capital sum not disregarded, exceed £16,000.” (now £19,500).

It is important that advisers are fully aware of the above provisions as they may make a considerable difference to clients. It is generally accepted that, when planned well ahead, there is nothing wrong with conversion of non-disregarded assets, such as cash or shares, into a disregarded form such as a non-qualifying life policy. Of course, this must always be subject to the personal circumstances and any investment objectives of the individual concerned. However, any last-minute action, such as transferring assets into a life insurance bond shortly before making an application for assistance, is likely to be caught by the provisions dealing with deliberate deprivation.

Paragraph 6.061 states that a deprivation of capital may occur if “capital has been used to purchase an investment bond with life insurance. Councils will wish to give consideration, in respect of each case, to whether deprivation of assets has occurred, that is, did the individual place his capital in such an investment bond so that it would be disregarded for the purpose of the Assessment of Resources Regulations.”

It is important that in considering whether deprivation has occurred, the most important aspect is the motive or intention of the investor. It is all the more important that good financial planning reasons are given for investment bond purchases and recorded in reasons why letters.

The clarification of the rules in the new version of Crag is to be welcomed although it is understood that some local authority assessors are continuing to take the surrender value of investment bonds into account when making assessments. The clarification should be of assistance to advisers active in this area but they should also bear in mind the rules about deliberate deprivation. It should also be remembered that the above rules apply not only to investment bonds but to any life insurance policy, including secondhand endowments.

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