The launch of a new hybrid life and care protection insurance plan could be the start of a new era for protection and long-term care insurance.
As well as the newly named Vitality Life, other protection providers including Ageas Protect and Zurich have also indicated plans to launch similar cover. The move follows government encouragement of insurers to develop new solutions to help fund care, especially for older people.
The new products work by building an add-on option to a conventional whole of life or term insurance policy. Under the Vitality Life model, part or all of the sum insured is paid out early if the customer is diagnosed with a qualifying condition or is unable to complete certain activities.
Haven’t we been here before?
An ageing society may mean the need for long-term care insurance has never been higher. Insurers, though, remain cautious, not least because many lost money when ‘long-term care’ was previously launched with much noise in the early 1990s.
Back then, insurers quickly faced a number of problems. Average premiums for pre-funded regular premium plans were more than double the average for income protection plans - the nearest equivalent protection plan, paying out a monthly income if a pre-retired person couldn’t work because of illness or disability - and many decided pre-funded cover was too expensive.
So products were bought mainly by people in retirement and had to be funded from (lower) retirement income or capital. Few younger people saw the need or were persuaded to buy the plans, so the average customer age was usually in their late 60s or early 70s.
Many products were investment-linked and reviewable, and relied on over optimistic growth rates to work. When that growth failed to appear, subsequent product reviews led to unexpected sharp rises in premiums or benefit cuts.
Claims were also much higher than anticipated. Partly, that was because people going into care now did so with few or no financial concerns. As a result they tended to live longer. With average life expectancy measured in months for many, any increase could have a dramatic effect on profitability. Anti-selection was an issue too.
The FSA regulation at the time ratcheted up and placed a high qualification hurdle in front of advisers. Many decided it was not worth trying to obtain such qualifications for the small amount of business they would write. As well, state help for LTC was often considered hard to decipher.
Are the new products different?
The new breed of plans look to be radically different from those we saw in the 1990s.
