Some 50,000 old people a year are forced to sell their homes to fund care when they can no longer look after themselves - so why is long term care dying a death, asks Samantha Downes
The long term care (LTC) issue continues to challenge the insurance world. With the idea of pre-funded LTC products all but discarded, the pressure is on to find a solution that copes with demographic reality - we are living longer, but at least one in four will need financial and emotional support to do so.
Attempts to reignite the LTC debate started in earnest earlier this year with two hard-hitting Government reports. Firstly, there was the Audit Commission, Healthcare Commission and Commission for Social Care's joint report, Living Well in Later Life. This report showed that the overall standard of care for the elderly remains pretty poor.
Within days of its publication in March the report was followed by the King's Fund study, Securing Good Care for Older People. The controversial paper, put forward by ex-NatWest boss Sir Derek Wanless, recommended a total overhaul of state spending on LTC provision.
Sir Derek said Government spending should triple to £30bn by 2026. This, he believes, will remove the need for LTC means-testing and pay two-thirds of the cost of everyone's care regardless of wealth.
Such a move would end what many regard as an unfair system which penalises those who have spent their lives saving and it would bring the cost of LTC in England, Wales and Northern Ireland into line with Scotland, where each person needing LTC gets a universal care benefit of £195 a week.
Wanless estimates that 50,000 older people a year have to sell their home to fund their own LTC because they have assets which exceed the current threshold of £21,000.
After that they are expected to fund the entire cost of residential LTC except nursing costs.
Challenge
"The Wanless report has opened up the debate again, but I don't see where the money is going to come from. People will still have to set some money aside to pay for LTC costs. Getting people to face up to that is the challenge," says Nicky Cave, head of Millfield Care Partnership.
It is this reluctance that has been blamed for the near-death of the pre-funded LTC insurance policy market. One-by-one providers of the policies, which work much like income protection, have dropped out of the market. Norwich Union, Skandia, PPP Lifetime Care and Scottish Widows phased out their offerings so that by summer 2004, just Partnership Assurance, then called the Pension Annuity Friendly Society, was the only company to offer a form of pre-funded LTC.
Cave, also managing director of LTC marketing company Elder Care Solutions, says pre-funded products are too expensive and unappealing to attract anything but a niche market.
She says: "People don't want to pay a lot for something they feel they are not going to need, or don't want to think they are going to need. Even clients with the money to do so.
"Faced with a bill for LTC most clients, or rather their families, are opting for an immediate needs annuity."
An immediate needs annuity can be priced according to age and health. So an older, sicker client will pay less for an impaired life version.
Other options clients are going for include critical illness, but this can be a gamble since the illness and the need for LTC may not coincide, says Cave.
Cave thinks the future is bleak for the LTC market. "For the moment, no one is talking about any new LTC products, pre-funded or otherwise. You should never say never, but I haven't heard anything," she says.
The one remaining provider of pre-funded LTC, Partnership Assurance, has also started looking elsewhere and is currently doing a roaring trade in immediate needs annuities. Between 1999 and last year, premiums on these rocketed from £2.7m to £45m.
Younger clients
Graham Duffy, LTC funding manager at Partnership Assurance, admitted that the firm's pre-funded product was less popular and tended to be bought by younger clients - those in their early- to mid-50s.
He denies the products are unappealing but admits they are extremely niche. "Most providers have pulled out because they underestimated the cost of offering them. Basically, the policies just paid out too often and for longer periods than insurers had expected," he says.
Partnership Assurance still sells enough policies to justify a rejigging of its pre-funded product.
The Flexible Care Account, now called Care Prepared, used to only cover nursing care, when the claimant was not considered to qualify for NHS support. Now it can be adapted to cover the cost of residential care too.
"We've now built in a more flexible option that allows people to be paid an income, depending on cover chosen. They can then use that money, which is tax free, to pay for home or residential care."
The policies can also be inflation-proofed, although that will cost more.
Duffy dismisses criticism of the reviewable nature of pre-funded policy premiums. He says: "Some of these policies may be running for 30 or 40 years, so to have a guaranteed premium for that period of time is unrealistic. We are reviewing the premiums every five years, which we feel is fair."
However, while Partnership Assurance still believes pre-funded LTC is a good proposition, most providers withdrew their LTC offerings due to poor demand.
Lawrence Jackson, head of annuities at Norwich Union, which withdrew its pre-funded LTC product in January 2004, says: "The low level of take-up was one of the main reasons we withdrew the product and we are not looking at any new similar products. People are opting for immediate needs annuities and equity release products to fund their LTC.
Families
"We are also finding that a large number of people are still relying on their families to help them. But of course, in the future with the growth of single families and the falling birth rate that may not be an option."
Peter Fisher, director of Help the Aged's Equity Release Service and its Care Fees Advice Service, says there is still a need for pre-funded care.
"The problem is the premiums charged on these products were just too much. Firstly, actuaries got their sums wrong and the re-insurers took a big hit.
"They then received more claims than they expected and those claims were for longer. And then secondly product premiums became exponentially bigger to cover the costs," he says.
Fisher believes immediate needs annuities are filling the gap, especially for advisers who only occasionally do LTC business. He rates PPP and Partnership Assurance as the best providers. The latter has the lion's share of the market, writing around 80% of new business.
However, he is alarmed at the growing use of equity release to fund LTC.
"For advisers who don't know their stuff, equity release is a minefield."
Pointing to a client who was recently referred to him from a Citizens Advice Bureau, Fisher says: "They had approached an adviser about putting in place an equity release plan to pay for a husband's care. When we got involved we found out there were more benefits the husband was entitled to.
"These are benefits he would not have received if he had released cash via equity release. It was worrying."
Fisher warns: "A lot of advisers are now doing regular equity release business but when it comes to using it for LTC you have to be very careful."
The implications of selling an equity release plan need to be considered.
"Equity release can help certain people who want to fund their own care but there can be huge costs in terms of loss of benefits and each individual is different."
Exams
A good adviser will need to have passed the CF7 and CF8 exams but even then they need to be aware of the local situation, claims Fisher.
"Because when it comes to LTC each authority has different funding criteria and although the average cost of care is £580 a week it can vary widely throughout the UK."
Sandy Johnstone, a former Norwich Union director who has set up his own consultancy, Careful Decision, has been working with the Joseph Rowntree Foundation on what must now be the holy grail of LTC - a partnership between the Government and insurers.
"A revival of pre-funded LTC is unlikely. We have to move forward. The only people who go for it are older versions of those who see the benefit of long-term pension planning. They are very rare indeed."
During research for his paper, Private Funding Mechanisms, published by the foundation, Johnstone wrote that the reality is the public are still disinclined to buy LTC products.
He says: "That is unlikely to change. It's human nature. At the moment immediate needs annuities are the most popular way to fund LTC because people buy them only when they need them.
"What we need as an industry is a statement from the Government that it is serious about helping people or doing something, anything.
"The problem will not go away, it will get much bigger and the only way to move forward is a partnership between the Government and private sector."
Samantha Downes is a freelance journalist
