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Spend & Save

Have a capital old age ...

There are several options open to people who want to set aside money for long-term nursing care without jeopardising their inheritance. By Roddy Kohn
Looking good and feeling great at 72 is something Jane Gasrowoski can proudly claim. Despite this, however, Mrs Gasrowoski feels that she is now at a stage in life where consideration has to be given to the possibility of her needing long-term care, either at home or in a nursing home.

It does not surprise her to learn that there are different ways to plan for this type of problem. And in spite of those insurance companies involved in long-term care insurance, who would have her believe that every septuagenarian in the land is likely to face this need, Mrs Gasrowoski is just as concerned about what happens to any money she pays out if she doesn't need to claim.

She has capital on deposit of pounds 30,000, a house worth pounds 75,000 and pensionable income of pounds 100 per week. She knows that because she has assets in excess of pounds 16,000, no state assistance will be given to help pay for her needs.

Having already looked at a number of nursing homes, she has found that typical costs would be around pounds 425 a week, and she would like an allowance for personal expenses of, say, pounds 20 a week. Taking the interest into account from her building society capital and her pension income, this means there is potentially a shortfall of pounds 316 per week, if she was in need of full- time nursing home care, and those nursing home fees are likely to escalate, probably considerably in excess of inflation.

Having lived through the Depression, Mrs Gasrowoski is not only cautious but feels that the security provided by owning her own home is particularly important. To a certain extent, this simplifies her choice because it leaves her to make one of two decisions.

She can choose to make a lump sum payment to an insurance company, to meet the anticipated shortfall. This lump sum payment is likely to be in the region of pounds 16,000 to pounds 18,000, depending on the benefit required and the company chosen.

Before she can claim, however, most companies will require that she is unable to carry out three specific daily activities, such as washing, dressing, feeding, mobility etc. Some companies offer the opportunity to claim when just two activities cannot be carried out, but in such cases generally only 50 per cent of the insured benefit will be paid. However, the reality for most people, Mrs Gasrowoski included, is that 50 per cent of the benefit would not cover the cost incurred if she had to be treated in a residential home.

Alternatively, some insurers offer the opportunity to pay monthly or annual premiums at just over pounds 2,000 per year, which continue unless and until she needs to make a claim. This is not an unattractive proposition because the payments could be met predominately from the interest on the building society deposits. Mrs Gasrowoski's capital would be reduced by about pounds 500 per year and, in theory at least, this would last 30 years before she might have to think about using the equity in her home.

If she invested some of the existing capital in Corporate Bond PEPs, she could withdraw the income annually (typically around 8.25 per cent net), to contribute towards the annual insurance premiums. While this type of PEP involves risk, it is generally considered to be low risk and would enable her to receive interest almost two and a half times the net rate she is receiving on deposit.

The Secretary of State for Health, Stephen Dorrell, is expected to announce a partnership arrangement soon that will increase the amount of assets older people can have before they have to pay their own long-term care bills, provided they have taken out a long-term care insurance policy to provide the initial costs of care. In this case, making monthly or annual insurance premiums will avoid the risk of commuting a lump sum now only to find out that changes in government policy may reduce the cost of providing cover and remove the need to pay such a high lump sum.

Meanwhile, how does she protect her capital in case she dies without making a claim? A single premium payment to an insurer in return for guaranteed fee payments when a claim arises undoubtedly gives peace of mind. Most insurers also require clients to take out five-year term assurance so that in the event of death before a claim some or all of the capital can be returned. Terms vary from insurer to insurer, but they all seem to agree that after five years no further life cover is provided and therefore no capital can be returned even if the policy-holder dies without claiming.

In her particular circumstances, making annual premium payments, at least in the short term, would give her both the peace of mind and assurance that if she is unable to look after herself some provision can be made without diluting her estate. On the other hand, if she lives too long this could prove to be expensive when compared with the single premium.

An alternative would be to look at a "whole of life" contract, which provides a sum of money on death that could be written under trust for the benefit of her son, John. Mrs Gasrowoski would then be able to defer making any decision about her capital or her house at the moment in the full knowledge that the costs for her long-term care could be made from the sale of her property while still leaving John with his inheritance, The cost for this type of cover is typically pounds 1,800 a year.

In her case, however, the cost is very similar to the long-term care premiums and the life assurance premiums would very likely rise at the 10-year review. The Inland Revenue may also not regard it as normal affordable expenditure and this could, in effect, disallow the tax-exempt benefit payable to her son.

The writer is principal of the Bristol-based independent financial advisers Kohn, Cougar.