The new generation

Long term care insurance (LTCI) suffers from two negative selling points. First, the possibility of needing LTC seems to be both unlikely and too far in the future for most clients to contemplate. Second, premiums are expensive.

But there are other protection products that include LTC benefits on the market. Ranging from critical illness (CI) to income protection (IP), more products are emerging that offer a practical solution to possible LTC needs by allowing clients to switch benefits from their existing plan at retirement age.

According to Paul Heaphy, protection marketing manager at Zurich, the need to plan for LTC is higher than most people realise. 'Policies are cheaper to buy when clients are young, but the problem is that most people do not see a need for it. The fact is, however, that there is a reason to buy cover because although we are living longer, the average age of illness has not changed. People still begin to suffer illnesses in their 40s, 50s and 60s, but are living into their 80s,' says Heaphy.

Simple solutions

Zurich's solution to this problem is to offer a care support option within its whole of life (WOL) plan. This way, clients can choose to receive 10% of their sum assured over a period of 10 years if they find that they are in a position where they need to pay for LTC after hitting 65. With the average LTC period for men being three years and for women eight years, the 10-year pay out period should be sufficient to cover most people's needs.

'The money can be used to pay for private healthcare, updating their house or anything that they need to improve their standard of living if they become incapacitated. The average sum assured is around £200,000, so an average customer opting for this benefit would be entitled to receive around £20,000 a year for 10 years,' says Heaphy.

Buying the added care support option costs between 5% and 15% of the WOL premium. For a single, non-smoking male, aged 35, with £10,000 death cover, it costs an extra £3.85 a month, meaning a total premium of £64.08. For a woman with the same criteria, it costs an extra £5.65, bringing the total premium to £58.36. The benefit is paid if the client fails three out of six activities of daily living (ADLs) which include washing, dressing, feeding, toileting, transferring and mobility. If the benefit is not paid out then the money is ploughed straight back into the customer's estate and nothing is lost.

Possible problems

But Michael Whittaker, LTC product development manager at PPP lifetime care, says clients with WOL policies that are primarily taken out for death benefit could lose out to inheritance tax (IHT) if they switch the policy over and then do not make a claim. 'If someone has genuinely taken out a policy to provide death benefit for an inheritance then it would be written in a trust so as to avoid a hefty IHT bill. A trust can not be used however, if the policy has an accelerated payment facility. So, if the sum is not used before death, it could turn out to be an inefficient investment,' says Whittaker.

Pegasus also offers its CI clients the option of switching to LTC benefits at age 65, by paying out a lump sum or a regular income if three ADLs are failed.

Claims can also be made for key degenerative conditions such as Alzheimer's disease, dementia, Parkinson's disease, deafness and blindness. According to Nick Kirwan, product development manager at Pegasus, the reasoning behind the plan option is simple: 'The idea behind the launch of the LTC option was that WOL cover should be able to meet the needs of the client for the whole of their life,' he says.

Kirwan believes that having the option to receive payment as a lump sum is an important benefit as it enables clients to get access to their money immediately as they may not have long to live. If the installment option is taken, then an uplift is also applied to reflect interest. Seeing as the plan is switched from CI to LTC and the risk is actually lessened, clients can also benefit from cheaper premiums.

'When people buy CI cover, the main drivers for the purchase are mortgage protection, family protection ' such as school fees ' and to safeguard earnings. When people retire, none of these factors apply, so we give clients the option to convert the plan to LTC cover. This is purely optional, but if they do switch cover, then their premiums will actually work out less, as CI is more expensive in retirement years than LTC,' says Kirwan.

CI plans with LTC options can also help target younger clients who may not usually consider protecting themselves for LTC until premiums have soared. 'Taking a LTC option on a CI policy is a realistic and sensible way to buy LTCI. The average age that people take out a LTCI policy is 68, whereas with CI it is 38. Seeing as there is no need to have the policy underwritten again when the CI policy is converted to LTC, it can be much more affordable,' says Kirwan.

But Whittaker says clients could be losing out on valuable CI cover at the worst possible time by changing the benefits over to LTC. He also warns that lump sum products may fall short of care payments if the client suffers from certain conditions that do not affect longevity.

'I would definitely say that having some cover for LTC is better than none, but the problem with lump sum products is that you do not know how much money you need to fund care until it happens. Someone who suffers a stroke may die relatively quickly, but other conditions, such as Alzheimer's disease, can still lead to a normal life expectancy and it is doubtful that the lump sum would be enough to pay for care. By switching a CI policy over to LTCI at 65, the chances are that clients will be throwing away cover for conditions such as heart attacks and cancer at a time of life when they are most likely to need it,' says Whittaker.

Alternative benefits

BUPA Healthcare offers a different alternative for LTCI ' an IP product. Geoff Brown, managing director at BUPA Healthcare, says the decision to provide life long cover on IP plans was made because the need for income no longer disappears at retirement. 'These days, people still need protection post- retirement, the need is just as great. We did not see a reason why IP should therefore stop at retirement age,' says Brown.

BUPA's 'lifetime' option allows clients to continue their cover post-retirement. The customer receives the same benefits, paid in installments, as if they had claimed during their working lives. The only change is the basis for making a claim. Instead of being occupation-related, it is based on whether the customer fails three ADLs. If a client qualifies for payment post-retirement, the amount payable is based on their earnings 12 months prior to their selected retirement date. Payments are based on up to 50% of these gross earnings.

The additional cover boosts premiums up by about £20 a month for men and £30 a month for women.

According to Brian Bartley, head of operations at BUPA Healthcare, the lifetime product can be used as an alternative to an LTCI policy, but it depends on how much the customer is insured for. Those on a lower salary may struggle to meet nursing home costs, for example, with only 50% of their previous earnings.

'Payments are based on a percentage of the customer's salary, so it depends on how much the customer is earning as to whether it would be enough to support their LTC needs. If care costs can not be met in their entirety, then the payments can be used as a valuable supplement to a pension,' says Bartley.

Targeting younger clients

Although there are obvious limitations in plans that switch over to LTCI, when compared to a fully comprehensive LTCI product, such alternatives should not be ruled out. The problem of trying to get younger clients to think about LTC protection needs to be addressed. If people refuse to think about the possibility of needing care until it is too late, then these plans could at least help to encourage future planning.

Graham Fidoe, chairman of intermediary organisation IFA Care, says the new plans should be welcomed by the industry. 'Anything that highlights the need for LTC protection has to be welcomed, and if it is a less expensive alternative then it should be encouraged. These plans probably provide the easiest way of overcoming the difficulties and problems of planning LTC and will probably appeal more to younger clients which are hard to target with traditional LTCI plans,' he says.

Innovation is desperately needed in the LTCI market and these plans appear to show some promise of the shape of things to come. By taking a more flexible approach to benefits, Brown says that policies such as these will have more appeal and ultimately encourage the take up of LTCI.

He says: 'As an industry we are very good at pigeoning insurance into categories. What we need to do is have a rethink and realise that the majority of customers do not want any of the existing contracts, they need a combination of them.'