Advice for long term care can help clients find funding solutions for their care that is suitable for their needs, affordable and matches their risk profile and financial priorities. In this article, the Brand Financial services team explore some of the key considerations paraplanners would need to understand when supporting the financial advice process in this area.
Paying for long term care can be complex and expensive. Care in a nursing home is particularly costly and can quickly deplete current income and capital. Individuals with more than £23,250 in capital assets (the upper capital limit, or UCL) typically need to fund their own care.
The Conservative government had planned to increase the UCL to £100,000 and cap the lifetime amount an individual is expected to contribute towards their care costs at £86,000. These changes aimed to help with budgeting and enable better financial planning. The plans were originally set to be introduced in October 2023 but were delayed until October 2025. However, with a new government in place, we may see further delays or the plans could be scrapped altogether. This uncertainty in itself brings challenges to the financial advice process.
Homeowners
Those who live alone may be required to use the equity in their homes to cover care costs. This often involves the challenging decision of whether to sell the house or to enter into a deferred payment agreement (DPA). A DPA allows the local authority to place a legal charge on the property, effectively lending money for care costs against the property’s value which is repaid when the property is sold.
There are exemptions where the value of your home is not considered in the means test, such as if your spouse or another dependent continues to live in the property.
Long term care and State benefits
It is important to understand the State benefits which can help with funding of long term care. These include:
Personal Independence Payment
Individuals who have difficulty with activities of daily living—such as feeding themselves or maintaining personal hygiene, may be entitled to the Personal Independence Payment (PIP). This benefit is available to those over 16 and under the State Pension age. PIP is not dependent on National Insurance contributions (NICs), means-tested, or taxable. Instead, eligibility is based on a health condition that has caused difficulties for at least three months and is expected to continue for at least nine more months, except for terminally ill claimants with a life expectancy of less than six months.
Attendance allowance
Those over State Pension age who have been severely disabled for more than six months or are terminally ill are entitled to the Attendance Allowance. The rate depends on whether the claimant needs care during the day or night or both. This benefit is not dependent on NICs, means-tested, or taxable.
Disability Living Allowance
Disability living allowance (DLA) is being replaced by other benefits, although some claimants are still in receipt of the DLA and under 16s can make new claims. It is neither NIC dependent, means-tested nor taxable.
Main types of long term care insurance
Immediate needs plan
Immediate needs plans may be bought by individuals using their existing savings at the point of need to cover the shortfall between income and the cost of care.
It is effectively an impaired life annuity with special tax concessions. Providing the income is payable directly to a registered care home, it will be paid tax free. Otherwise, it will be taxed as a purchased life annuity with the return of capital being tax free and the income element being taxable as savings income
Like most annuities, an immediate needs plan will pay an income for life and the amount payable will depend on the annuitant’s state of health at outset. The shorter their life expectancy, the more income their annuity will pay.
Eligibility is determined by a lack of capability to perform one or more of the activities of daily living (ADLs) or by suffering from a cognitive impairment such as Alzheimer’s.
The income can be level or index-linked to help keep pace with the increases in the cost of fees as time goes on and a guarantee can be built in to safeguard against the loss of the premium on early death.
Deferred care plan
A deferred care plan is also an annuity that will pay a tax-free income to the care provider but the plan will start to pay out at a selected date in the future rather than immediately. These policies are cheaper because the annuitant will have to self-fund during the deferred period.
They provide peace of mind that if the annuitant needs care for a long period of time, they won’t have to worry about their savings running out because the income from the deferred care plan will kick in.
Pre-funded insurance style contracts
Pre-funded insurance-style contracts were once available on the market, although no products are currently sold. A pre-funded insurance policy could be established with either regular or single premium payments and will provide benefits if the insured requires care at home or in a care facility. Starting the policy earlier generally resulted in lower premiums.
One such contract was the pre-funded investment-linked policy. This policy combined a regular premium long-term care insurance with a single premium investment bond. The bond’s fund paid the insurance premiums. If no claim was made, the bond’s remaining value at the policyholder’s death was returned to their estate. If a claim was made, the bond’s remaining value was returned to the policyholder. If the bond’s investment growth did not meet the insurer’s expectations, the insurance coverage may have been reduced, or premiums increased.
Other contracts include care cash plans which provide a lump sum or regular income for a set period upon diagnosis of an age-related illness such as Alzheimer’s or Parkinson’s. Typically, a payout is made if the diagnosed illness prevents the claimant from performing three out of six ADLs.
In Summary
As the population ages, the demand for long-term care is rising and clients in need of long-term care insurance are often particularly vulnerable. It is therefore essential for those involved in the financial advice process to be fully up to speed with the entire subject area to help clients make the most appropriate decisions regarding the funding of their care.
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