Long-term care refers to care you need for the foreseeable future, maybe as a result of permanent conditions such as arthritis, a stroke or dementia. It could include help with activities such as washing, dressing or eating – in your own home or in a care home (residential or nursing). Long-term-care insurance is one way of paying for this care.
The state may provide some help towards the costs of this care depending on your circumstances. Check with your local authority to find out what support they give.
There are other ways to help you cover the cost of care, including using savings and investments.
Types of long-term-care insurance
There is currently only one type of long-term-care insurance, which you can buy either when you have been medically assessed as needing care regardless of your age. This is known as immediate-care long-term-care insurance.
In the past it was possible to buy pre-funded long-term-care insurance in case you needed care in the future. These contracts are no longer available to buy, but you may have an existing policy.
Immediate-care long-term-care insurance
What it does
You buy an immediate-care plan with a lump sum. This pays out a regular income for the rest of your life, which is used to pay for your care.
Costs
The amount you pay varies depending on:
- the amount of income you want
- whether you want the income to increase, for example with inflation
- your age and sex, and
- the state of your health.
You’ll be assessed medically to determine how much you must pay for your chosen level of income.
Key things to think about
- You should check what’s available from your local authority first, to ensure you don’t lose out on means-tested state benefits.
- If you have valuable savings or assets (such as a home) that you don’t want to lose, long-term-care insurance may be worth considering.
- Long-term-care insurance may also help you choose better quality care than your local authority would help pay for.
Questions to consider with your adviser
- How much cover do you need? Most long-term-care insurance policies tend to cover only part of the cost of care, with the remainder coming from your income and state benefits.
- How much could you pay out of your income (including state benefits) towards long-term care, and how much extra would you have to find to meet likely care fees?
- How much would long-term-care insurance cost to meet the shortfall?
- What happens when you die? Usually the income stops and capital is not repaid unless you’ve chosen a plan which provides some death benefit (such as a lump sum paid to your estate).
- Is inflation taken into account? Most plans let you choose whether or not the money you get from the policy is fixed, or increases either by a set amount each year or in line with inflation.
- Are there other more suitable ways to meet the cost of care?
Pre-funded long-term-care insurance
What it does
This is an insurance policy that will pay out a regular sum if you need care. It pays out if you are no longer able to perform a number of activities of daily living (such as washing, dressing or feeding yourself) without help, or if you become mentally incapacitated. The money it pays out is tax free.
Some policies may be linked to an investment bond, which is intended to fund the premiums for the insurance policy. These policies involve investment risk and, in some cases, can use up your capital.
Costs
You pay either regular premiums (for example on a monthly or annual basis) or a single lump sum premium. In either case, the insurance company usually reviews the plan, say every five years, and the premiums may then rise – even if you’ve bought a single premium policy. Premiums depend on your age, sex and the amount of cover you choose.
Is it still right for you?
- You might never need care, and so you don’t claim, in which case you may not get any money back. However, with an investment-linked policy, you get the balance of the investment fund if you cash in the policy. But how much you get will depend on how well the investment has performed and how much the insurance premiums that it is intended to fund have increased – in some cases there could be nothing left.
- Any money you get from the policy may affect the amount you can claim in means-tested state benefits.
- If you have valuable savings or assets (such as a home) that you don’t want to lose, long-term-care insurance may be worth considering.
- Long-term-care insurance may also help you choose better quality care than your local authority would help pay for.
- If you think that the policy no longer meets your needs, you may be able to change it. But make sure you get advice from a professional financial adviser before making a decision.
Questions to consider with your adviser when reviewing existing policies
- How much cover do you need? Most long-term-care insurance policies typically cover only part of the cost of care, with the remainder coming from your income and state benefits.
- How much could you pay out of your income (including state benefits) towards long-term care, and how much extra would you have to find to meet likely care fees?
- How much would long-term-care insurance cost to meet the shortfall?
- What’s not covered? Temporary problems, such as care after an operation won’t be covered. Nor will health problems caused by alcohol or drug abuse, or due to attempted suicide, or if it relates to HIV or AIDS. Some mental conditions such as depression and schizophrenia are also usually excluded.
- What happens if you die before you claim on the insurance? This will depend on the type of policy and the options selected. Some insurance policies will pay out a lump sum to your estate if you die within the first few years of taking out the policy without actually claiming on it. However, most pay nothing. Investment-based contracts should return the balance of the investment (but this will depend on investment performance and whether insurance premiums have reduced the value).
- What happens if you die after you claim? This will depend on the type of policy and the options selected, but usually the income stops. Some plans may provide a minimum return or a capital lump sum. Investment-based contracts may return any unused capital.
- Is inflation taken into account? Most plans let you choose whether or not the money you get from the policy is fixed or increases either by a set amount each year or in line with inflation.
- Are there other more suitable ways to meet the cost of care?
Top tips
- Check what state benefits you may be eligible for and what your local authority can provide.
- Check what’s not covered and ensure you disclose any existing medical condition.
- Ask questions if anything is not clear.
