In contrast to the pre-funded long term care market, sales of immediate needs annuities continue to flourish. Owain Wright explains what advisers need to know
In August, Skandia, following hot on the heels of Norwich Union, Lifetime Care, BUPA and Scottish Widows, became the last of the major providers to withdraw its pre-funded long term care (LTC) insurance contract from sale.
With the exception of one or two less mainstream hybrid products, there is now no insurance policy available for people to consider should they wish to insure against the possible costs of requiring care in their later years. And with care costs averaging about £24,000 per year and there being approximately a one in three chance of a person requiring some form of care, this obviously presents something of a financial problem.
The main reason behind providers' withdrawal from the market was the lack of present and future growth potential. Insurers require scale in order for insurance products to be viable in the long-term and with the pre-funded market contracting instead of growing, it was a fairly easy call for them to make.
So why did the pre-funded market fail? People are happy to insure their car, their house, even their cat. Why then would people not consider insuring against the huge potential risk of requiring care in the future?
A number of reasons have been put forward. Policies being too expensive and too inflexible are often cited as the main reasons. But it is possible the real reason lies a bit deeper than that. Professional advisers working in the LTC market should ask themselves when they last gave some consideration to the possibility of paying for their own care? The likelihood is they probably haven't as yet, so why should their clients be any different?
Process of denial
The whole subject of requiring care goes hand in hand with the issue of death and that is still a subject most people are very uncomfortable with. Psychologically, most people deal with this through the simple process of denial by ignoring the issue and putting it off until it arrives. Which is why the pre-funded market has contracted, while the immediate needs market has positively thrived.
One of the main obstacles with the pre-funded market, is that the issue of requiring care was only ever a potential problem. The immediate needs market however, is made up of people who already have a problem. In other words, they require care, are faced with £24,000 a year in care costs and they need immediate advice on how best to deal with tackling the issue.
The average client will present a set of circumstances not too dissimilar to the following: They are currently in a hospital, which is probably putting pressure on the family to find a care home. They will own their home valued at approximately £140,000, have capital of £70,000, income of £9,000 per year and are facing care fees estimated at £24,000 per year.
For some, this can be a simple income generation exercise possibly using either investments or an immediate needs annuity. On the other hand, it may require dealing with issues such as shared beneficial ownership of the property, the eligibility or otherwise to NHS funded care, section 117 entitlements and the splitting of accounts.
Indeed, it is the lack of detailed knowledge of the immediate needs market which has kept it from positively burgeoning in recent years. Most professional advisers are now aware of the LTC market. Most are also aware that it is often not as simple to advise on as it may seem to be at first.
But more and more advisers are investing the time necessary to ensure they are able to understand and advise on all aspects of the immediate needs market, not just the products.
This means that more advisers are competent to advise on immediate needs, which means that more advice is given and, not surprisingly, more products are sold. A good barometer of activity in the immediate needs sector is the sale of immediate needs annuities - also known as care fee annuities or care home income plans. Between 2001 and 2003, the sale of this product has more than doubled.
Competitive
An immediate needs annuity is similar to a purchased life annuity because it provides an income for life, or at least for as long as care is required. The two main differences are that each annuity is individually underwritten and the payments from the annuity provider are paid free of tax so long as they are paid to a recognised care provider.
There are four companies that offer this type of policy, Norwich Union, Lifetime Care, GE Life and PAFS. Each will have its own view on an individual's longevity and their premiums will therefore vary accordingly.
For example, an adviser approaches all four companies on behalf of his client, Mrs Smith. She has £80,000 in the bank and requires £10,000 per year to meet the gap between her care fees and her spendable income. No one company is the most competitive every time but, on this occasion, let us say that Lifetime Care requires a single premium of £40,000 while PAFS, GE and NU each require in excess of £50,000. Although the most competitive provider has been found, is it the right policy for Mrs Smith?
As the terms effectively amount to a bet between Mrs Smith and the annuity provider, the only person who can really decide if those terms are worth proceeding with is Mrs Smith herself. In the event of her surviving for four years, the annuity will have time to pay for itself. If however, she were to die soon after the annuity had been purchased then the purchase will, of course, prove to have been an expensive one.
Detrimental effect
It is usually possible with this type of annuity to buy some form of capital protection to safeguard against the early demise of the annuitant. However, whereas reduced longevity helps to improve the annuity term, it can have something of a detrimental effect on the cost of capital protection, often making it prohibitively expensive.
Clients that do purchase this type of annuity do so for a number of reasons, such as financial certainty, peace of mind, to avoid being a burden on the family and to sort out the problem with one payment. While some clients will find their terms to be too expensive, another client in identical circumstances may well consider it to be very good value.
This month will see the introduction of regulation of the LTC market. Immediate needs products have been regulated since inception, but along with regulation will come a new examination that is set to provide a far sterner test of advisers' knowledge of LTC than was ever the case with G80. Furthermore, the exam will be mandatory from October 2006 for anyone giving LTC advice.
Some commentators have voiced their concern that regulation will constrict the LTC market and stop it from growing. Others believe that regulation will help to increase confidence among the buying public with the end result being that more people will actively seek advice.
LTC advisory companies in the market will also have a part to play. As well as dealing with direct enquiries from the public, they will also have to deal with the ever-increasing number of enquiries from other professional advisers whose specialism lies elsewhere. So for those advisers who do not wish to spend time getting up to speed with LTC matters, there will be an alternative to simply ignoring the issue.
Formerly, one of the most common remarks received from clients was that they didn't know they could get advice on how to fund their care. Fortunately this is becoming more rare and this is, in large part, due to the continuing advancement of the LTC market cycle. Where once there was no market, now there is a recognised source of specialist help and information.
The market is likely to continue maturing over the next few years, perhaps with the introduction of one or two new immediate needs providers. The question, especially with regulation only weeks away, is how advisers will choose to handle the issue of LTC with their clients.
Owain Wright is head of The Care Funding Bureau
COVER notes
• The average cost of care amounts to £24,000 per year.
• There is a one in three chance of an individual requiring some form of care in later life.
• Between 2001 - 2003, the sale of immediate needs annuities more than doubled.
