Chapter 5: Long term care insurance products

Question 1

Products that fall under pre-funded LTCI?

Answer 1

– protection and convertible policies;
– LTC bonds (care bonds).

Question 2

Products that fall under Immediate need care plans:

Answer 2

– immediate need annuities (a variety of impaired life annuities);
– deferred care plans.

Question 3

Products that fall under Equity Release

Answer 3

– lifetime mortgages;
– home reversion plans.

Question 4

Purpose of a LTCI or risk-based LTC?

Answer 4

It is a stand-alone, risk-based, protection product and the purpose of these policies is to pay out a regular sum if an individual requires continuous care. These are sometimes available as an optional benefit on other types of policy.

They are not generally available in the market.

Question 5

Main features of pre-funded LTCI?

Answer 5

• Level of cover selected at outset.
• No investment content.
• Premiums may be paid on a regular basis or by single contribution.
• If the applicant claims, benefits are payable (where requirements are satisfied); if there is no claim, no benefits are paid.
• Benefits can usually be indexe-linked
• Premium payments and benefits may be guaranteed throughout the term of the policy or be reviewable

Question 6

Risks of pre-funded LTCI?

Answer 6

• Plans pay out in the event of LTC – this is only of use if it is actually required.
• The client has to satisfy the provider’s LTC claim criteria.
• There are no guarantees that the amount of LTC benefit will equal the level of fees required.
• The premiums for most policies are reviewable. This means that future costs are unpredictable.
• Policies are underwritten at outset, individuals who already have existing medical conditions may not be eligible.
• Benefits are usually only payable where the individual is resident in the UK, EU and certain other territories.

Question 7

How are benefits of pre-funded LTCI taxed?

Answer 7

Tax-free to both insured and care provider

Question 8

Taxation of pre-funded LTCI premiums?

Answer 8

no tax-relief available.

Question 9

What is a convertible policy?

Answer 9

Include an option to convert some or all of the benefit into long term care benefit or an income on disability that could fund (or part fund) continuous care.

They are currently available in the market.

Question 10

Which protection policies generally have a convertible option?

Answer 10

• whole of life plan or protection platform.
• income protection policy.

Question 11

What is a long term care bond?

Answer 11

Lump sum investments designed to pre-fund anticipated LTC needs. They have the attraction that, as with pre-funded schemes, they should be able to provide LTC costs at a lower cost than immediate needs schemes. They were essentially investment bonds.

These products are not currently offered.

Question 12

How are care bond dissimilar to investment bonds?

Answer 12

• The LTC benefits are paid for by an additional charge or deduction from the value of the fund to pay for the risk premiums and care. Thus, the LTC bond will produce a lower future investment return (or perhaps even a negative return).
• LTC benefits are paid using the current cost method. The charge will increase with age.
• LTC benefits and assistive devices are payable/provided where the life assured is unable to satisfy pre-determined ADLs.
• Underwriting at the outset was required.
• Fund performance is reviewed on an ongoing basis to ensure that the assumed level of growth is achieved. If it is not, then an additional lump sum may be required or benefits may need to be reduced.
• On receipt of a claim for LTC benefits, the accumulated fund value may be transferred into a safe fund.

Question 13

How are the benefits of a care bond taxed

Answer 13

There is no income or capital gains tax on the care benefit paid.

Care support services and assistive devices are also paid tax free to either the insured or the care provider.

No tax relief is available for lump sums paid into care bonds.

5% original withdrawals were allowed as per investment bonds.

Question 14

for clients with an existing care bond, what should you cover within a review?

Answer 14

• investment performance.
• the cost of providing LTC benefits (more modern arrangements may be available at a lower cost).
• how disability is defined
• the care bonds continuing suitability for the client’s needs.

Question 15

What is an immediate needs annuity?

Answer 15

In return for an initial lump sum into an annuity, the individual receives a set income for the duration of their life. This can be used to meet the care costs in whole or in part.

These products are currently available in the market.

Question 16

If an immediate need annuity is used to pay for informal care in an individual’s own home, the payments to a higher rate taxpayer would be:

Answer 16

Capital element is tax free.

Interest element taxed 20% at source.

Additional 20% tax on the interest element via self assessment.

Question 17

What is a deferred care plans?

Answer 17

Deferred care plan is the term used to describe a plan where there is a care need at the outset but the care benefit is not paid immediately.

The benefit may, for example, not start for a deferred period of between one to five years, although the ‘disability’ must exist when the plan is set up.

The client will self-fund for the deferred period.

These products are currently available in the market.

Question 18

When would a deferred care plan be suitable?

Answer 18

The cost of the annuity to provide the care is substantially reduced. The greater the deferred period, the greater the saving.

For individuals who are self-funding their care costs, the annuity removes some of the uncertainty and anxiety they may have about living beyond their ability to self-fund their care.

Question 19

If an impaired annuity is enhanced due to client’s profile, which part of the annuity is enhanced?

Answer 19

It is the interest element (which is potentially taxable) that is enhanced, not the tax free capital element. Remember that payments to a registered care provider are paid free of tax.

Question 20

Taxation of Immediate needs annuity and deferred care plan?

Answer 20

Where the annuity is paid directly to a registered care provider, the benefit is entirely tax-free. Most providers will require the benefit to be paid to the care provider direct.

If the annuity is paid to the individual, the income will be treated as part return of capital and part savings income. The portion treated as capital is paid free of tax and the income element is taxed as savings income at 20% (higher rate taxpayers will be liable to an additional 20% and additional rate taxpayers an extra 25%).

Question 21

Risks of INA and deferred care plans?

Answer 21

• Limited scope to alter the arrangement once established.
• Cash returns on death are usually where capital protection is selected at outset.
• They are only available to those whose life expectancy is restricted.
• Some providers set a maximum on the size of the annuity that may be taken.
• Some providers may put an upper age limit on their annuities, e.g. age 90.
• someone with an average stay in a care home would probably be better off financially if they take an INA from the outset;
• there is usually limited capital protection
• if there is capital protection, it is generally quite expensive to provide, reducing the income

Question 22

What are activities of daily living?

Answer 22

ADLs are the accepted method in determining the physical capabilities of disabled people.

They are tasks upon which personal hygiene, basic health and (to a degree) survival depends. They are likely to be used for both pre-funded and immediate need plans although different providers (and some schemes offered by the same provider) will offer different levels of benefit determined by the number of ADLs failed.

Question 23

What is the definition of cognitive or mental impairment?

Answer 23

This is a significant deterioration or loss of intellectual ability which results in a need for continual supervision or care to protect the individual or others and results from an organic cause.

Question 24

What are the core areas covered by ADLs?

Answer 24

Washing
Dressing
Mobility: The ability to move indoors from room to room on level surfaces.
Transfer: The ability to move from a bed to an upright chair or wheelchair and vice versa.
Feeding
Toileting

Question 25

Features of a lifetime mortgage?

Answer 25

A loan is secured on the property value or the future value of the property.

Borrowers retain the right to live in the property for the duration of their life.

Mortgage is repaid from the sale proceeds of the property. The customer cannot lose the home nor can the accumulated debt become larger than the amount the property is sold for on death or moving into care.

Minimum age is usually 55.

Allow borrowers to raise either a lump sum or take an income. If the full amount of the available capital isn’t taken at the outset, they may offer a ‘draw-down facility’.

The money released is tax-free but if it is invested subsequently, this may result in a potential tax liability

Question 26

What is a roll up mortgage interest rate?

Answer 26

The borrower does not make any interest payments. Instead, these are added to the amount of the mortgage debt to be repaid when the property is sold. This means that on the eventual sale of the property, the amount outstanding will often be considerably more than the amount borrowed.

Question 27

What is a home reversion plan?

Answer 27

Instead of arranging a mortgage, all or part of the property is sold and the owner retains the right to continue living in the property.

There is a chance to gain from the future appreciation in the retained property value.

Question 28

Risk of home reversion plans?

Answer 28

It is unlikely that the individual will get the market value for the property at the time it is arranged. Something in the region of 1/3rd to 2/3rds is more likely.

Schemes will still require the individual to maintain and insure the property and these costs could be substantial.

Plans are difficult to reverse. It is often not possible to sell until death or a permanent move into care.

If house prices increase in the future, the individual will not benefit from any appreciation in value on the part of the property that was sold.

Question 29

When might equity release be suitable in LTC planning?

Answer 29

when individuals intend to self-fund care in their own home. The capital raised by such schemes may provide income that was otherwise not available to pay care costs.