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Put a premium on filling the old age care gap

The gaps in the welfare state. We look at the benefits and costs of the policies on offer: a cheap price may not always be a good thing; The cost of caring for the elderly can be frightening - up to pounds 600 a week , writes Juliet Oxborrow. Long-term care insurance is a way to plan ahead.
One in five people aged over 85 require residential long-term care, and 40,000 houses and flats are sold each year to pay for care, according to the insurer, Swiss Re UK. Yet few of us plan for the costs of care in old age.

Looking after the elderly and infirm is not cheap. A home-based carer costs pounds 5 to pounds 7 an hour, according to the charity Help the Aged, rising to a hefty pounds 8 to pounds 12 an hour if nursing is involved. Even if friends and family are willing to help out in the evenings and at weekends, care at home can cost well over pounds 10,000 a year.

If someone needs to go into a home, the costs become frightening. Residential homes may charge pounds 400 a week and a nursing home pounds 600 a week.

The state provides support, but this is means tested. Local authorities have to meet the full cost of care if a person has less than pounds 10,000 in assets, but this includes their home. Those with assets valued between pounds 10,000 and pounds 16,000 will have support reduced by pounds 1 a week for every pounds 250 of capital, or fraction of pounds 250, over pounds 10,000. If you have assets over pounds 16,000, the local authority need not pay anything.

Steps can be taken to maximise state support, such as transferring property to children, but local authorities take a dim view of attempts to shift the cost of care on to them. Individuals and their families inevitably have to meet some of the bills.

Long-term care (LTC) insurance aims to plug the care gap. Policies have been marketed for five or six years in this country, although only 30,000 have been sold, according to research consultancy Datamonitor.

Health insurance companies Bupa and PPP recently reduced their long-term care sales forces, describing demand as "disappointing". The industry is now pinning its hopes on the government offering tax incentives to encourage long-term care provision.

Most LTC plans are straightforward insurance policies. In return for a one-off payment or regular premiums, the insurer agrees to pay out a monthly sum when the individual is no longer able to perform two or three day-to-day activities. These include dressing themselves, washing or feeding, or if someone is diagnosed with a degenerative illness such as Alzheimer's disease.

Premiums can escalate rapidly with age, so it pays to buy sooner rather than later. Commercial Union says a non-smoking man of 50 wanting cover of pounds 1,000 a month would pay premiums of pounds 35.74 a month, while a 65-year- old would pay pounds 62.86 a month, almost twice as much.

Current state of health is also a factor. Insurance may be refused to individuals who are already showing signs of infirmity. Most plans also stipulate a maximum starting age, typically 80-85 years.

Benefits are usually paid directly to the carer or nursing home, in which case they are tax free. In return for higher premiums, benefits can be indexed against inflation to have a better chance of keeping pace with rising care costs. Payments usually start one to three months after a claim, but premiums can be cut by opting for a longer deferment. This will mean having to use savings in the interim.

Premiums can also be reduced by specifying the period for a claim. Policies are generally taken out on a whole-of-life basis, paying out until death. Plans may also include a lump sum pay-out to buy special equipment, such as an electric stairchair.

Another type of plan, offered by Irish Life International, Scottish Amicable and Royal Skandia, is a long-term care bond. Contributions are invested and the investment profits are used to pay insurance premiums to cover the cost of care. The original capital is ring-fenced so it can be passed on intact to future generations.

Long-term care insurance and bonds need to be arranged well in advance of care being required. In cases where funds are required immediately - when someone has already entered a nursing home, say - families can look to annuity-based schemes, available from Commercial Union and Norwich Union, which provide an immediate income in return for a lump sum. Unlike other LTC plans, income from an annuity plan is taxable. Both the Norwich Union and Commercial Union schemes are 'impaired life' annuities and will pay higher than average rates if the beneficiary is particularly disabled.