At this year's COVER Protection Forum, calls were made for a critical illness product offering built-in retirement cover as a way of addressing the cost of long term care. What are the pros and cons of developing such a product?
Market views
Eugene McCormack, UnumProvident
Critical illness (CI) products are unlikely to provide the solution to the issue of long term care (LTC). A recent suggestion has been made to create a conversion option on CI policies, which would pay out when the claimant is over 65 years of age. The claim would be based on the person's ability to perform certain activities of daily living (ADLs), rather than on the diagnosis of a specific illness. But what the client needs in this situation is an income to meet the cost of care, rather than capital.
In this case, income protection (IP) products may provide a better starting point. A possible solution could be to convert the policy at age 65 to an ADL claims basis, rather than the current occupation basis.
The need for LTC for the elderly does not happen overnight. Deterioration in their condition and their declining ability to take care of themselves is a gradual process. It would, therefore, be worthwhile aligning the development of any product with service providers, who could deliver service in the home, such as domiciliary nursing care, house maintenance, shopping and transport. The cost could be funded in full or in part from the benefits paid on the extended IP plan. This provision could preserve home life, dignity and prevent the spiral of depression and decline, which ultimately leads to expensive residential care. Collaboration between insurance providers and the UK assistance industry could facilitate this development.
Jason King, Life Policies Direct
There are some similarities in the design and purpose of CI and LTC products, therefore, aligning CI and LTC seems like an attractive option. However, looking at the structure of products, advice and consumer buying habits in the UK, there are a number of fundamental differences that will be difficult to resolve.
The first is that most CI policies are taken up by people under the age of 40, whereas most LTC policies are taken up by the over 50s. This poses a problem for the adviser to help a client plan ahead, as the adviser has very little idea what the LTC landscape will look like in 20 years' time, let alone the client's individual requirements.
Another problem is that few protection advisers are suitably qualified to advise on LTC. There is also the problem of where a product like this sits in the advice process? It is not so much a protection product, but a form of retirement planning.
Given that few people have adequate life assurance and protection cover, it could also be perceived as bad advice to recommend a LTC conversion option ahead of these more immediate needs. It is difficult to see how providers would marry a term CI benefit with what must essentially be a whole of life (WOL) LTC benefit. Presumably, such an option would have to be on a WOL plan, for which there is already little provider support.
Peter Hamilton, Friends Provident
The idea of this product is superficially attractive. The current CI offering meets a genuine need and there is also no doubt that future care costs are one of the biggest problems society faces. The costs are spiralling upwards, as is the number of people who will need care in the future, so forward thinking is important as many will rely on relatives to help them out if needs be. But with a trend towards smaller families more geographically spread, this will be an option for fewer people in the future.
While this product design is a good idea in theory, there are two main challenges to the combination product – clarity and affordability. The danger with asking one product to do too much is that the customer is unclear about what is and isn't covered. More problematic still, is the cost. An insurance-based solution implies a pooling of risk, where some people claim and some don't. Keeping CI affordable is difficult enough, even though many customers will be fortunate enough not to have to claim. With LTC, as the customer ages, the possibility of a claim almost becomes a near certainty.
Built-in retirement cover therefore looks impractical. The need to save more for the certainty of old age and a reducing income has been well documented, but more needs to be done to encourage the take up of stakeholder pensions. Equally, we're likely to see the introduction of more equity release products. Advice here will cover areas such as State provision, the likely value of the house and costs of care needed; and related issues such as an understanding that any future inheritance would be diminished if not drained entirely.
Richard Walsh, ABI
Society is changing and the boundary between work and retirement is no longer a fixed point. It seems this trend is likely to continue, especially with the introduction of age discrimination legislation. There will also be a growing number of people seeking protection insurance policies that simply do not fit the current restrictive mode.
With this in mind, some form of CI or IP product that can be used to meet health needs is a good idea. That, combined with the extra income people can obtain through these products as impaired annuities, could make a positive contribution to society – including helping to fund LTC. As always, the devil will be in the detail of the proposal, in particular, what would trigger a claim and how much would the premiums be? That is the key issue.
