Has private long-term care insurance’s time come around?

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Long-term care insurance products didn’t take off in the UK in the 1990s but could provide an answer to the enduring misperception that personal liability for care home costs is capped at £72,000 after 2016.

LONDON, 4 September 2014 - A significant number of people in the UK who will need to enter a care home in the future could be in for a nasty surprise about who picks up the majority of the bill, according to Towers Watson.

Long-term care in the UK is set for significant changes in 2016 with the recent signing into law of The Care Act 2014. One of these changes includes the much publicised £72,000 ‘cap’ on long-term care costs. But what still appears not to be widely understood, notes the company, is that the cap applies only to a portion of the local authority care rate.

“The reality is that individuals or their relatives remain fully responsible for room and board costs and, if staying in a private facility, any care charges over and above the local authority rate. This could easily amount to about £500 per week at present, a shortfall that private long-term care insurance products could help address,” said Stuart Butler, a senior consultant at Towers Watson.

Current options for funding care, if they are considered at all, frequently involve selling a property or some other form of housing equity release. Despite the cap, many could still find themselves in this situation without adequate financial planning.

After the 2014 Budget announcement on pension reforms that gives retirees more freedom over how they use their savings, Stuart Butler said that new products that contribute to long-term care costs could be attractive if the myth of the cap was more widely understood. “The idea that if you have savings or assets set aside of £72,000, you’re okay, is a false one that needs to be scotched.”

Public pronouncements have shown that the Government clearly wants a greater role for private insurance products in meeting rising future social care costs. A statement issued at the time of the 2013 Budget stated: “The Government expects the financial services industry to work creatively to amend existing products and develop new products that support people in making choices about how to plan for their care costs.” 

Despite the door having been held open, insurers have yet to take up the challenge. This may largely be as a result of the previous lack of popularity of pre-funded long-term care products when some came on to the market in the 1990s.

Vince Bodnar, Towers Watson’s global leader on long-term care insurance issues, said: “Insurers only sold a few thousand policies at that time for a variety of reasons, but market conditions are very different now. For a start, there will be a 31% increase in people of pension age – the group most likely to need long-term care - by 2037, who no longer effectively have to annuitise their accumulated pension funds.”

In the United States, which has a similarly aging population and where there has been no enforced annuitisation of pensions savings, sales of combination life insurance and long-term care products have been growing rapidly. Providers wrote $2.2 billion worth of premium for such products in 2011. The figure represented 13% of all life insurance premiums, up from 6% in 2010.

Vince Bodnar commented: “My perception is that the proportion of ‘combo’ products is even higher now. Critical to the growing acceptance of private long-term care products there has been the development of specialist sales organisations that only sell these kinds of policies. This is a lesson the UK market may need to take on board if it is to confront and address the myth of a long-term care cost cap.”

About Towers Watson:

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world.

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