Who cares when you get old?

Hugh Thompson looks at the insurance options available to cover long-term needs

The Government's long-awaited consultation document on the future of long-term healthcare for the elderly and infirm was published yesterday. It proposes a partnership between individuals, insurance companies and the state to cap the cost of insurance and make it possible for individuals to get care without having to sell their homes to pay for it.

Individuals will be able to buy long-term care insurance which will pay for home, residential or nursing care, if and when it becomes necessary, for up to three years. The individual may then have to pay his or her own costs but the state will take over before individuals are forced to sell their homes.

An estimated 40,000 homes a year are currently being sold to meet the costs of long term care. Without state intervention that will mount, as not only the number of people aged 75 and over rises from 3.9 million now to 6.3 million in 2030. Already 42 per cent of the over-65s report they are suffering from a limiting long-term illness, so the demand for care is going to rise dramatically.

A recent survey showed that two in three expect family and friends to look after them should they become dependent. But traditional care is declining. Divorce, increased mobility, working women, a reduction of family ties and, perhaps, an increased awareness of self and selfish needs have reduced the supply of family help.

The Government, realising that it can no longer afford to foot an open- ended bill, especially with a declining tax-paying workforce, is looking more and more to insurance for long-term care as the answer.

The insurance industry uses a chilling set of initials, ADLs, to calculate when the benefits pay out begins on any long-term care. ADLs are the "activities of every day living". The big six are considered to be walking, dressing, feeding, using the toilet, mobility and transferring from bed to chair. Develop permanent inability in any three and you qualify to claim as disabled in some degree. Typically, the available insurance cover is designed with a view to allowing the insured to stay in control of his or her capital. The double indemnity in these situations is a long-term illness that is not only painful in itself but exhausts not one but several generations' capital.

One of the first offers in this market was the Long Term Care Bond launched by Scottish Amicable in 1994. Here the investor pays a one-off sum into a bond that is invested in a European investment fund not subject to UK tax. A level of care cover is selected. The average age of the investor is 65, the average amount invested is pounds 27,500 and buys annual cover of pounds 11,000. A claim can be made when an investor can no longer perform three ADLs.

A typical scenario is pounds 25,000 being invested. Then, after 10 years, the insured goes into care. By then, the fund is worth pounds 60,000, of which pounds 35,000 is placed in a deposit fund and is used to pay care costs for a maximum of five years. After that, Scottish Amicable pays all future long-term costs. Statistics suggest that the average stay in long-term care is less than five years. In which case, the original pounds 25,000 and anything left over from the pounds 35,000 stays intact for the estate.

Also in the market are PPP, Commercial Union, Hambro Assured and Prime Health. The proof that this market is really - dare one say it - coming of age (not least as the Government cuts back its own commitment and moves to encourage self-provision) was the recent launch of Bupa FutureCare. Subscriptions can be on a one-off or regular basis and subscribers can opt for moderate or continuous care either for three years or for the rest of their lives. A 65-year-old man going for continual care for the rest of his life (payments kick in when the inability to handle two ADLs begin) pays either pounds 59.95 a month or a single premium of pounds 8,519. For women, the costs are considerably higher as most of those in long-term care are women (who tend to outlive the males). Cover for moderate care, since it is more commonly needed, is also more expensive.

Benefits are paid after a waiting period of three months. Increasing the flexibility of cover, participants can choose to extend the waiting period to 12 or 24 months.

No two long-term care policies are exactly the same. Prime Health Home Health Care policies have been designed to look after the customer as old age approaches, and includes 21 or 28 hours a week (depending on level of cover) care by a registered nurse plus a range of private day care and surgical procedures.

PPP's lifetime care policies are more flexible and can be based on either a lump sum or regular (monthly or annual) premiums, or a combination of the two. The policies are designed to offer financial protection. There is an upper age limit of 84 for single premium payments. As in other policies, the monthly benefit is paid tax-free to the care provider. The monthly benefit can be paid throughout the insured's life or limited by the plan paying out a maximum sum of money.

The Government's new initiative will take at least two years to implement, but companies such as PPP have promised to adapt existing plans and refund any savings to the customer.