One of the most significant reforms of care and support, the Care Act 2014, passed into law in May 2014. But, while the first part was introduced in April 2015, the second element has been delayed until 2020, creating much uncertainty for those advising clients on care fees funding.
This delay affects two key elements of the reforms, which were originally timetabled to come into force in April 2016. As well as an increase to the thresholds for means-tested support (which would have seen the upper limit rise from £23,250 to £118,000) the £72,000 cap on care costs is also on hold.
Under pressure
Although it is still committed to introducing the cap, the government announced the delay in response to concerns raised by the Local Government Association. While figures from the Institute and Faculty of Actuaries show that it would take at least four years before anyone entering care would reach the cap, local authorities would feel the financial hit much earlier. In particular, as they are responsible for managing the care cap, they would require additional resources to provide the necessary assessments to determine an individual’s eligibility for it.
To help take some of the pressure off local authorities, chancellor George Osborne announced a new social care precept of up to 2 per cent on council tax, to enable authorities to raise £2bn for the care system. However, this has already been labelled as just a sticking plaster by the National Pensioners’ Convention.
The delay also raises doubts about whether this element of the Care Act 2014 will ever be introduced. “2020 is such a long way off. A reasonable person would be forgiven for thinking the government was pushing it into the long grass altogether,” says Jim Boyd, corporate affairs director at Partnership. “But even if it does introduce it, the delay creates uncertainty, which will stop advisers and consumers taking action to plan ahead.”
Care options
While care fees funding may be in limbo, several of the insurers have added care options to their whole-of-life products. These are designed to accelerate payment of a proportion of the sum assured if someone needs care.
The first to launch was Vitality Life back in November 2014. Its product, Lifestyle Care Cover, is a whole-of-life plan which, as well as paying out on death, will also pay out if the policyholder suffers an illness which leaves them permanently incapable of looking after themselves.
The policyholder can select the proportion of their life cover they would like to be able to take early, up to 100 per cent, and claims are assessed on activities of daily living. In addition 20 per cent of the chosen Lifestyle Care benefit can be paid on earlier diagnosis of Alzheimer’s, Parkinson’s or dementia. Any remaining benefit will be paid on death and, if required, an option can be added to automatically reinstate the full sum assured.
AIG Life has also entered the market, launching its plan, Care Cover with Whole of Life Insurance, in November 2015. This allows policyholders to take out up to £400,000 of life assurance and, if they are diagnosed with a medical condition which means they are permanently unable to perform three or more activities of daily living, they would receive 75 per cent of the sum assured as care cover benefit. Steve Casey, head of marketing and propositions at AIG Life, adds: “It is not intended to be a long term care policy in any shape or form but our research has shown that consumers are interested in this concept. Given what is happening with the care cap, people like the peace of mind that something is in place if they do need care.”
Cover conditions
AIG’s Care Cover can be taken out up to age 84 and there are no restrictions on when they can make a claim. If they do make a claim, the policy will cease and there will be no further benefit paid on death or diagnosis of a terminal illness.
Policyholders pay extra to include this benefit. For example, according to a quotation supplied by Highclere Financial Services, while a 71-year-old would pay £290 a month for £100,000 of whole-of-life cover from AIG, adding in the Care Cover option would push the premium up to £328 a month.
The third insurer in the market is Zurich, which is piloting its Later Life Flexible Option as an addition to its Adaptable Life Plan with select advisers. This also provides a proportion of the sum assured early, in this case 70 per cent, if the policyholder is unable to perform activities of daily living or is diagnosed with a loss of mental capacity. Like AIG’s plan, policyholders can take out up to £400,000 of cover and the plan ceases once an early claim has been paid.
Age plays a more important role on Zurich’s plan. Cover can only be taken out up to age 65 and a claim for an accelerated payment can only be submitted once the policyholder reaches age 70. However, by imposing these age-related conditions, it is able to offer this option at no additional charge.
Market reaction
Giving consumers the ability to fund future care costs within a whole-of-life policy has received a largely positive reaction from the market. Alan Lakey, managing director of CIExpert, describes it as a clever option but balks at the use of activities of daily living on these plans. “I appreciate that the insurers need to have a means to assess eligibility but I hate activities of daily living. They can be very subjective and lead to some very strange claims decisions,” he explains.
However, the simplicity of the concept and the relatively low cost of adding the option on the AIG plan and its free provision on Zurich’s plan does win his approval.
The plans are also welcomed by specialist long term care advisers. For example, Janet Davies, managing director of Symponia, says it is promising that, against a backdrop in which the government is delaying the care cap, companies are willing to explore care fees funding options.
But, although she believes it is positive that these insurers are helping to put care fees planning on the agenda, she is concerned that consumers sold these products might not receive comprehensive care advice. “Advisers do not need a long term care qualification to sell these whole-of-life plans. This means there is a risk that the amount of cover clients take out is about as useful as nothing at all,” she explains.
Financial implications
As an example, figures from the Centre for Economics and Business Research (CEBR) show that the average cost of care is £29,300 a year for a residential home and £38,800 for a nursing home. With average stays at 2.3 years and 1.4 years respectively, this puts average total costs at £67,390 and £54,320. Fail to have adequate funds to cover this and it could seriously restrict choice, especially where local authority provision becomes the only option.
Having too much money can also cause problems.
Ms Davies says that someone could find elements of their state support and benefits taken away if they received a payment from one of these plans. “When we advise on equity release we need to flag up how it might affect pension credit: the same should be true with these plans and benefits,” she adds.
With the government’s delay to the introduction of the care cap creating uncertainty and potentially apathy among consumers, it is positive that insurers are exploring this market and keeping care fees planning on the agenda.
But, the complexities of this area of advice mean it is essential the implications of these types of plans are taken fully into account.
Big numbers
£29,300 - average cost of a year in a residential home (Centre for Economics and Business Research)
£38,800 - average cost of a year in a nursing home (CEBR)
£94,700 - projected cost of average stay (1.4 years) in a nursing home by 2034 (CEBR)
£108,000 - projected cost of average stay (2.3 years) in a residential home by 2034 (CEBR)
82% - the percentage of over-45s who have not thought about or spoken to their families about future care needs (Partnership)
25% - the percentage of people who would have to sell their home to pay for care (AIG Life)
