As the population of the UK continues to age, the demand for social care increases, as do the associated costs. How to pay for long term care is therefore a hot topic in the insurance world and amongst policy makers.
This event will saw the launch of a new paper from the ILC-UK and Cass Business School which investigates different ways in which individuals can purchase and pay for insurance products specifically to help them to pay for their care costs in later life.
Chaired by Baroness Sally Greengross OBE, Chief Executive of the ILC-UK, the launch included a keynote presentation report co-author Professor Les Mayhew. Responses were given by Jules Constantinou, Regional Manager, Gen Re Life/Health; Brian Fisher, Aviva/Friends Life, and Steve Lowe, Just.
Ähnlich wie Paying for long term care insurance: The pros and cons of different payment methods - An ILC-UK, IFoA and Cass Business School joint event.
Ähnlich wie Paying for long term care insurance: The pros and cons of different payment methods - An ILC-UK, IFoA and Cass Business School joint event. (20)
3. Professor Les Mayhew
Professor of Statistics, Faculty of Actuarial Science
and Insurance
Cass Business School
Presentation of Paper
#LTcare
4. 4
Flexible and affordable
ways of paying for long-
term care insurance
Les Mayhew
Ben Rickayzen
David Smith
Faculty of Actuarial Science and Insurance
Cass Business School
lesmayhew@googlemail.com
5. 5
Where are we now?
• The 75+ population is expanding at 2.9% p.a. and the
85+ at 3.7% p.a. By 2030 there will be 7.1m 75+ and
2.3m 85+
• Hospitals are clogging up because too many old
people are being admitted and stay for longer
• Waiting times for elective patients are increasing and
targets in A&E are regularly being broken
• There is not enough money for social care to help
local councils meet their statutory obligations
• Reforms to the means test in the Care Act have been
put on hold until the next Parliament
6. 6
There are perceptions to be overcome
• Belief that social care is free of charge under the NHS
• People prefer not to think about it and so has low
priority
• Insurance is expensive and poor value for money
• Why pay for something that the state subsidises?
• The family will be there as a back stop
7. 7
Aims for today
• Investigate how to make the cost of long term care insurance
more palatable and affordable
We do this by:
– Revisiting the income-wealth spectrum of the older
population
– Consider the options open to them and the constraints
they face
– Give a worked example of an insurance product that could
be used for domiciliary care as well as institutional care
– Compare different methods payment on an equivalised
actuarially fair basis
– Ask what more Government can do to help
8. 8
What does the product do?
• It pays an index linked benefit regular benefit of a
contracted amount for the rest of life
• It is triggered in the failure of a specified number of
Activities of Daily Living (ADLs)
• The amount of benefit increases if a person’s
disabilities become more severe
• The benefits do not matter whether the persons is
living at home or in nursing care
• It is in effect a type of ‘disability-linked annuity’ or
DLA
• The benefit paid does not purport to cover all costs
which are impossible to predict in advance
9. 9
Methods of payment
• A regular premium paid for out of income which
ceases when care is triggered
• A capped premium which is paid for over a specified
period of time e.g. up to the age of 85 for any start
age
• A lump sum payment from savings, pension lump
sum or inheritance windfall
• Payment occurs after death using the value in the
home (a form of equity release)
10. 10
Retirement objectives
Apart from remaining healthy for as long as possible, we suggest
four common objectives in retirement:
1. Maintain a satisfactory standard of living, including paying all
bills with money left over for leisure, repairs, holidays and
family visits
2. Be able to gift money to close relatives such as children or
grandchildren (e.g. gifts, education costs or a deposit on a
home)
3. Retain control over finances to avoid becoming destitute or
dependent on the State, ideally with no debts
4. Reduce exposure to inheritance tax so that as much of their
estate as possible remains and their legacy is protected.
11. 11
£0 £5000 £10,000 15,000 £20,000 £25,000 £30,000
Income p.a.
£250k
£225k
£200k
£175k
£150k
£125k
£100k
£75k
£50k
£25k
£0k
Assets
Income-asset map at age 65+
P
Q
12. 12
Segmented income-asset map of the 65+
population
Contours represent people with the same levels of wealth based on
income and assets
13. 13
Segmented income-asset map of the 65+
population
Contours represent people with the same levels of wealth based on
income and assets
2.5m 0.9m
3.6m
4.3m
14. 14
To buy or not to buy?
Group
Method of
payment
No reduction in
current standard
of living
Gift
opportunity
Less likely to
fall back on
the state if
care needed
No or
reduced
exposure to
IHT
A Do nothing
B Regular payments
C Single premium
D Housing equity
Retirement objectives that condition responses as to whether to seek financial
projection for care costs in later life.
Key: more likely to apply; x less likely to apply
15. 15
Timing of purchase is important
• The earlier it is purchased the cheaper the policy, but
affordability and cash flow are important
• These are affected by having dependent children,
outstanding debts including mortgages and other factors
• Our own view is that 65 is as good an age as any but
circumstances will vary between individuals
• Where cash flow is important the better option might be
equity release
16. 16
How are premiums calculated?
We consider the following care pathways a person could embark
upon.
The 4 possibilities are to die:
1. Before becoming disabled – i.e. no benefit is paid
2. After becoming moderately disabled
3. After becoming severely disabled (having been previously
moderately disabled)
4. After becoming severely disabled (having not previously
been moderately disabled)
17. 17
Care pathways
Schematic of the possible care pathways. Does not include case where
person dies before needing care
18. 18
Illustrative example
An insurer needs to make financial assumptions about the future in order to
price a policy at the point of purchase:
For our example, we assume:
• Inflation at 2% per annum
• Investment return at 4% per annum
• House price inflation at 3.5% per annum
• Maximum age when premiums cease for capped version is 85
Value of benefit when moderately disabled £10,000 per annum
Value of benefit when severely disabled £25,000 per annum
No payments when insured person is in good health
19. 19
Illustrative example
Care pathway
Percentage
by pathway
type
Time spent in care
states (years)
Domiciliary Residential
No care 70% 0 0
Domiciliary only 10% 4 0
Domiciliary and residential 10% 3 2
Residential only 10% 0 2
Assumptions used in the model that underpin the premium values in the
next slide. These assumptions can be varied as appropriate for creating
different scenarios
20. 20
Results of premium calculations
Age at
commence
ment of
policy
Regular
premium
(£ p.a.)
Capped
premium
(£ p.a.)
Single
premium
(£)
Equity
Release1
50 508 525 9,298 10,923
55 597 625 10,109 11,621
60 713 760 10,958 12,335
65 869 952 11,831 13,052
70 1,087 1,249 12,706 13,753
75 1,400 1,773 13,546 14,409
Note 1: The methodology underpinning the derivation of these results is given in
the appendix to the report
Note 2: The value is used to calculate the percentage of the home that must be
ceded in the equity release contract. For example, a 50 year old who owns a
house worth £100,000 would need to cede 10.923% of the equity when
purchasing the product.
21. 21
Which is best?
• All payment methods produce the same value of benefits if
care is required
• Without insurance the individual bears the cost and may lose
their savings and their home
• If a person dies without needing care the “do nothing” is best,
but not if care duration is of any appreciable length
• If house prices rise more slowly than was assumed in the
pricing basis, then equity release is the better choice
• But if the insured is asset rich and income poor, choosing
equity release is best as it does not affect their present
standard of living
22. 22
Incentives to purchase
Here are some levers…
• Parity with pension contributions
• Tax but treat the benefits tax free like ISAs
• Disregard some of the benefits for means testing
purposes
• Creation of care accounts
• Pay the benefits gross to designated care providers
23. 23
Summary
• There are no financial incentives to save for or protect against
care costs
• The means test discourages saving and so people are
conflicted about whether to save or not
Our ideas would fill an important gap in the market by:
- Protecting people in their time of greatest need
- Making the cost of care more palatable and help protect
living standards
- Providing protection against loss of home and hence
helping the next generation
- Introducing new incentives to save or purchase insurance
24. 24
Additional points
• The Government needs to use the policy vacuum to find new
financial solutions to the looming crisis
• The insurance industry needs to be re-engaged with the
policy making and funding process
• Tax and other incentives need to be considered and costed
including changes to means testing
• Access to the benefits is dependent on failing of ADLs not
entering a care home
• The new money entering the system would improve the
quality of care as well as the capacity of the system
25. Jules Constantinou
Regional Manager, Gen Re Life/Health UK & Ireland,
representing the Institute and Faculty of Actuaries
Responses from Discussants
#LTcare
26. Brian Fisher
Long Term Care Marketing Manager, Aviva/Friends Life
Responses from Discussants
#LTcare
