Pay as you go

Immediate needs long term care (LTC) products are designed to help fund care for those who need it now. They are essentially impaired life annuities providing guaranteed monthly payments to cover all, or part, of the policyholder's care costs. Payments continue as long as care is needed and where the fees have to be met by the resident. They provide a means of converting a capital sum into income to meet the ongoing costs of care ' usually for life. There are also plans that offer a benefit payable after a deferred period of between two and five years.

Currently, only four companies offer branded immediate needs LTC insurance plans (see table 1).

These plans were developed from the identified need of older people having to pay for care, who would otherwise be disadvantaged from the purchase of traditional annuities. For older people in care suffering poor health, traditional annuities took no account of their poorer state of health and therefore their reduced life expectancy. Care fee payment plans were developed to meet this market niche and offer more competitive terms that could otherwise be offered by traditional annuities, or other ways of paying for care.

Costs for life

The pricing of these plans is principally determined by underwriting considerations from the assessment of both activities of daily living (ADL) and the various other disabilities that could cause shortened life expectancy, such as strokes, cancer, dementia, Alzheimer's and so on. From the information submitted on a detailed questionnaire provided by the insurer ' supplemented by further underwriting information, reports from the GP and possibly the care home ' the insurer will make a judgement on life expectancy. In simple terms, the poorer the prognosis, the better the terms for the older person requiring care.

The ultimate financial benefit to the person receiving care will depend on how long they live. The security these plans offer gives the reassurance and peace of mind that, through the provision of a rising level of income, care costs could be met for life. Consequently, the capital remaining after the purchase of the plan can be released with the principle objective of achieving capital growth for the benefit of bequests under the terms of the person's will.

All plans have the significant tax advantage of allowing payments to be paid gross, providing they are remitted direct to the care provider. However, if care is no longer required, payments will be suspended. Norwich Union provides an option for policyholders to switch their plan so that the net of tax payments can continue to the annuitant.

For residents with potential inheritance tax liabilities, significant savings could be achieved. The cost of a care plan could be 40% lower since the premium will be coming out of assets otherwise subject to death duties. It can substantially reduce the break even point at which the estate would benefit from this type of arrangement.

Therefore, apart from one or two differing aspects of tax consideration and underwriting, the plans are very simple and straightforward. Generally, the older you are and the poorer your health, the cheaper the premium for a specified amount of income.

Take Mrs Smith as an example. She is 80 years old, has suffered a stroke and now needs nursing home care. She has capital from selling her house of £100,000 and income including state pension and attendance allowance totalling £564 per month. A home has been chosen where the fees are £500 per week (£2,167 per month). After the assessed NHS contribution of £70 per week (£303 per month), a shortfall of £1,300 per month is to be met from capital.

A care fees payment plan providing £1,300 monthly rising by 5% per annum for life, nil capital protection, will meet the shortfall in fees and could cost approximately £40,000. Her remaining capital of £60,000 invested primarily for growth, if achieving 6% per annum, would have grown to approximately £80,300 after five years. Unlike many older people paying for care today the longer she enjoys her stay in the care home the more money she will be able to leave for her family. Compared with using a bank or a building society deposit, her capital remaining after five years would stand at over £68,000 more by using a care fee plan and investments. This is illustrated in table 2.

Simple, or is it?

For the experienced advisers who understand both the subtleties of the plan, their implications in relation to the client's general financial affairs and have a good working knowledge of the Community Care Act legislation, there are likely to be no problems. However, from work undertaken with various voluntary groups and solicitors, poor advice could lead to significant claims for compensation.

For example, Mrs Smith's family accepts your advice and purchased a care plan. Unfortunately, she suffers a stroke after three months and dies. The plan has no return on death so all that remains is the balance of capital not used to purchase the plan i.e. £60,000. Not surprisingly, the beneficiaries are upset and, possibly, some of them were not consulted over the original advice and may have had a different view to the power of attorney.

The matter is referred to a solicitor who seeks to establish from the IFA the research he undertook on the alternative care plans available. It transpires that no indication was given to the client on the possible options under the care plans, which could include partial capital protection at a slightly enhanced premium. It turns out that this information was never sought by the IFA and, therefore, never offered to the client. The client's family indicates to the solicitor that, had they been aware of this option, they would certainly have exercised it so as to get added peace of mind, should the relative die prematurely.

It is essential that advisers have an understanding of benefit entitlement and local authority charging procedures. The following points should be kept in mind:

• The cost of a plan can be reduced if the client is advised to claim attendance allowance.

• A further saving can be made if an NHS contribution is claimed.

• If the cost of the plan were to reduce the remaining capital to below the £18,500 limit where help from social services can be sought, the purchase could be a waste of money if it is overriding statutory responsibilities.

• Where plans are purchased to fund third-party top-ups it is essential they are owned by the third party to ensure the income is not taken by social services to increase the resident's standard charge of £1 for £1.

• Where couples have joint savings, ascertain how much capital is required to meet the care costs. Many advisers are not aware that if only one member of the couple requires care, social services' help can be brought forward by splitting joint savings. For example, a care plan costing more than £21,500 in this instance would disadvantage the family (see table 3).

Prices for care plans can differ markedly. Mrs Brown, age 76 years, suffering from dementia, stroke and mobility problems requires extra monthly income of £1,036. Quoted care plan offers were:

• Company A: £45,018

• Company B: £32,084

• Company C: £31,298

• Company D: £23,461 (chosen)

Mrs Taylor, age 81 years, suffering from arthritis, requires an increased monthly income of £1,350 to meeting nursing home fees. Care plan offer quotes received were;

• Company A: £94,870

• Company B: £38,626 (chosen)

• Company C: £68,600

• Company D: £74,577

The above are not exceptional and we have on record comparisons with differences in excess of 400%. Therefore, it is essential to apply to all care plan providers.

Immediate need LTC plans, at first glance, are simple products. However, the area in which they are sold is complex. As the saying goes, a little knowledge can be a dangerous thing. This is most definitely the case for this product area.

However, in the right hands, these plans can offer an excellent solution, providing peace of mind and the certainty of rising income. It may also enable families to inherit far more on the demise of their relative.