The Care Cap, Insurance and Inheritance

Now the election is over it is worth looking closely at the Conservative Manifesto. Apparently David Cameron always carries a copy with him. The reason being that the Conservative majority is very small, they are in a minority in the House of Lords and manifesto promises are (by tradition) not defeated in the Lords. One interesting area is long term care and inheritance. Here they reiterate their commitment to the care costs cap which will come into effect in April next year and raising the inheritance tax threshold to £1 million. The inheritance tax change will be paid for by reducing tax relief on pension savings for those earning more that £150,000. Taken together, these changes could provide an incentive for those concerned about long term care costs up to the cap to look for insurance solutions.

An option that has been doing the rounds recently is based on the system in Japan and at the end of last year the Nuffield Trust produced a report on it. The Japanese system was introduced in April 2000 and the main financing features are that the money for it comes 50% from taxes and 50% from insurance premiums. The insurance premiums are collected from people 40 years and over and it is compulsory. Benefits are paid based on eligibility tests. It is only here that there are similarities with the care cap system in the UK. The impact of the system has been considerable. In 2000, ten per cent of the over 65 population were found to be eligible. By 2005, this had risen to 16 per cent (4.3 million). Expenditure rose from the expected ¥5.5 trillion to ¥6.8 trillion (1.5 per cent of GDP). By 2025, the Japanese Ministry of Health, Labour and Welfare estimates that maintaining existing levels of long-term care provision could require an additional ¥15 trillion, approximately 2.6 per cent of GDP. I cannot see the Government signing up to this one – or any other compulsory systems for example as in Germany. Having got rid of compulsory annuities why would they bring in compulsory long term care insurance?

So let’s travel to the USA. Here the private LTC insurance market is used by those who would not be eligible for Medicaid payments. Millions of Americans now have long-term care insurance purchased on an individual basis or through a plan offered by their employer. The number of individuals purchasing long-term care insurance for a specified number of years has increased. 76% of buyers in 2008 opted for coverage for a claim lasting five years or less. The most expensive long-term care insurance policy is one with an unlimited benefit period (one with no cap on the number of years benefits will be received).

The care cap in the UK is complex but in essence it is now possible to say that about one in eight people who enter nursing home care will benefit from it. That means that seven in eight will not. For both categories of people private insurance will be an attractive option. For insurers, it should be possible to design a product that works in tandem with the cap, ie. it pays out only up to a certain amount. The individual or the cap then picks up the rest of the tab. The smaller the amount of potential payout bought by people, before they need care, the lower the premiums. Post introduction of the cap it will be interesting to see if any new products emerge along these lines and whether the Government might provide incentives. One would be not to tax payouts under the scheme.

Written by SAMI Fellow Richard Walsh. First published in Cover Magazine, June 2015

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