Getting to Know the Main Types of Long-Term Care Insurance

Last week, we looked at State benefits for long-term care. In this article, we review the main types of long-term care insurance (LTCI) that are or have been, available. LTCI may be tested in CF8, CF1, R01, R05, R06 or AF5.

Given that State benefits are unlikely to cover all care costs and the presence of local authority means-testing, there is a market for long-term care insurance. The following are the main types.

Immediate needs plan

Immediate needs plans – sometimes called impaired life annuities – may be bought by individuals using their existing savings at the point of need.

Eligibility is determined by a lack of capability to perform one or more of the activities of daily living (ADLs) or by suffering from a cognitive impairment such as Alzheimer’s. ADLs typically include the ability to dress, feed, transfer, and wash oneself, as well as continence and mobility.

Like most annuities, an immediate needs plan will pay an income for life and the amount payable will depend on the annuitant’s state of health at outset. The shorter their life expectancy, the more income their annuity will pay.

Providing the income is payable directly to a registered care home, it will be paid tax-free. Otherwise, it will be taxed as a purchased life annuity with the return of capital being tax-free and the income element being taxable as savings income.

At outset, the annuitant can elect for a level or an index-linked income. Index-linking will help the income keep pace with the increases in the cost of fees as time goes on. Another choice to be made at outset is whether to select a guarantee so that the lump sum is not lost if the annuitant dies shortly after taking out the annuity. Once an annuity is set up and the cooling-off period has expired, the policy cannot be cancelled.

Deferred care plan

A deferred care plan is also an annuity, but rather than paying an immediate income, the income is deferred and is not payable until the annuitant has spent a few months or years in care. These policies are cheaper because the annuitant will have to self-fund during the deferred period. They provide peace of mind that if the annuitant needs care for a long period of time, they won’t have to worry about their savings running out because the income from the deferred care plan will kick in.

Pre-funded insurance-style contracts

Historically, pre-funded insurance-style contracts were available on the market. Although no new products are being sold, you may come across people with existing contracts.

A pre-funded insurance policy may be set up on either a regular or single premium basis and will pay out if the insured requires care either at or in a home. The earlier the policy is started, the cheaper the premiums will be.
To make a claim, the insured must be incapable of carrying out one or more of the activities of daily living or have been suffering from a permanent cognitive impairment for more than a specified length of time. Depending on the policy, the benefit may pay out until care is no longer needed, or for a limited period of time, say 5 years.

If the policy is cancelled, there is unlikely to be a refund of premiums. However, it may be possible to have the policy paid up, meaning that cover can continue but at a lower level.

Pre-funded investment-linked contracts

Pre-funded investment-linked policies were available at one time. These combined a regular premium long-term care insurance like the one we’ve just discussed, with a single premium investment bond. The funds within the bond are used to pay the premiums on the insurance. Should the policyholder be fortunate enough not to need to claim on their insurance, the remaining value of the bond on the date of their death will be returned to their estate. If a claim is made on the insurance, the remaining value of the bond is returned to the policyholder. If the investment growth on the bond does not match that expected by the insurer at outset, there may be a need to either reduce the level of insurance available or increase the regular premium.

Care cash plan

A care cash plan pays out a lump sum or regular income for a set period of time on the diagnosis of an age-related illness such as Alzheimer’s or Parkinson’s. A pay-out will typically be made if the illness diagnosed prevents the claimant from performing, say, 3 out of 6 of the activities of daily living.

Be aware!

Consumers in need of long-term care insurance are often particularly vulnerable. These products are therefore regulated by the Financial Conduct Authority.

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