Long Term Care - Types of Plan
Pre Funded insurance
By taking out insurance before care needs arise, it is possible to cover an individual for the financial consequences of needing to go into a care home in the future. Under this type of policy, benefits become payable upon the failure of a certain number of Activities of Daily Living.
The principal benefit of a long term care plan is the payment of regular tax-free income, which is used to pay for long term care costs, up to a pre-determined monthly limit. Payment is triggered by a claim in the event that plan-holders are unable to perform a set number of daily tasks ("activities of daily living" or ADLs: are explained below) or suffer from mental impairment (page 14). There is usually a ‘waiting period’ before payments begin (commonly three months), but some plans pay an immediate lump sum of up to 6 months' benefit for "assistive devices".
Plans can be set up to make payments on inability to perform 2 or 3 activities of daily living.
Monthly benefits can be up to a fixed level amount or for "indexed" amounts (growing at 3%, 5% or with inflation): indexed plans cost more.
Some providers pay only for care, up to the monthly limit, while others guarantee to pay the full monthly amount, in cash or care + cash as appropriate.
There is considerable variety in the plans available. It is vital that any plan you consider is tailor-made for your individual circumstances, income and capital and any arrangements for inheritance tax planning.
There are essentially two types of plan - those that are "pure insurance" and those that are "investment-linked".
Long Term Care Insurance Plans
These are pure insurance contracts. Plan-holders pay a regular (monthly or annual) premium or single lump-sum premium (or a combination of the two). At no time do these plans acquire a surrender value. Regular premiums cease when monthly benefits become payable. Depending on the contract, regular premiums may be guaranteed (or reviewable) and may cease at age 85 or 90.
Immediate Needs Annuities
This type of policy pays an income to pay for care costs as and when a need arises. In return for the payment of a lump sum, a fixed monthly income is generated to pay for some or all of the costs for the rest of their lives. If benefits are paid directly to the care provider, payments are tax free. The annuity rate depends on the state of health of the applicant and is based on the ability to perform Activities of Daily Living. The advantage of this type of plan is that it is guaranteed not to stop paying until death. Hence, if someone lived with Alzheimer's disease for a very long time and required residential care, the individual's assets would not run out and they could remain in a potentially far more comfortable care home before the local authority stepped in and moved them to the cheapest home available. The immediate care annuity is more tax efficient as benefits are paid tax-free, direct to the care provider.
For all the above plans, it is important to nominate a personal representative to ensure that the chosen plan is utilised should care be required and the planholder be unable to take decisions.
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