Dilnot’s Big Opportunity
The publication of the Dilnot report provides a once in a decade opportunity to arrive at a fair care funding system. Let us hope it has more impact than the last Commission report ten years ago. A crucial difference this time is that the contribution of private insurance to meeting societal needs is not in dispute and there is a possibility of cross-Party consensus.
From an insurance perspective the stakes in the ground are pretty straightforward for people over 65. Their contribution to care costs would be capped at £35k. The capped amount would be portable – in case they move from one area to another. And the amount they need to contribute to living expenses would be capped at £10k per year.
Three types of insurance are proposed. The first is a disability linked annuity. This product would provide a lower initial annuity income (by around 10%) but if the person failed three ADLs or simply reached 85 their income could be doubled or trebled. The report strongly recommends that these annuities should benefit from current taxation rules. The link to pensions is welcome but the payout is not related to the £35k cap. It needs more thought.
The second suggestion is equity release – as now. The third is CI or IP products that could convert into long term care insurance. These products did exist before the FSA decided that they would be treated as investment products (as were pre-funded long-term care products) at the time of their sale as IP. Not surprisingly there was an immediate exit by insurers.
The report recommends that the government set up a working group to enable the development of an effective market and support consumers in making sound choices. This group needs to look at why long term care insurance was so strictly regulated in the past. It should link in with the “simple products” work and seek to avoid potential consumer detriment.
Some of the key points that need to be addressed are: first, clarity on how much any policy will pay out. The simplest answer would be £35k (the cap) as a cash lump sum plus a top up of a set amount to cover living expenses. The CI model is simple. The alternative is a monthly income – initially higher to contribute towards the £35 cap plus living expenses and then reducing to living expenses. But this is sounding like a complex IP product….. Next, where does the money come from? Working this into pensions would be ideal – both at saving and post-retirement phase. Beyond home ownership, pensions are the only significant saving most people make and benefit from tax advantages.
Next is avoiding miss-selling. In the past one of the main scandals was long term care bonds. These were single premium policies where the money was invested in equity markets and a regular deduction made to cover the cost of the insurance policy. When the market crashed not only was the pot reduced but it was further reduced by the insurance premium deductions – some ended up virtually worthless. Any new insurance solutions need to ring-fence the long term care element of the product.
Next, when will the policies pay out? The simplest solution would be to directly link this to the national assessment decision. The alternative would be ADLs set by insurers – but here we would need to have a uniform system as with CI conditions. Unsuccessful attempts were made to achieve this in the past. Unless the industry wishes to accept the national assessment this issue must be resolved.
Finally, the situation for people under pension age will get much more complicated. Up to age 40 the State will pay all care costs (but not living expenses). Post age 40 there will be a tapered cap rising from £10k to £35. This may have implications for existing IP products – especially those linked to ADLs. Not only are they very difficult to claim on but under the new proposals they may have little relevance to income needs at the point of claim.
Written by Richard Walsh, Director and Fellow, SAMI Consulting
Published by Cover Magazine, 03 August 2011, click here to view published article