Paying for long term care insurance: The pros and cons of

different payment methods24th January 2017

#LTcare

Welcome

Baroness Sally GreengrossChief Executive

International Longevity Centre - UK

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Professor Les MayhewProfessor of Statistics, Faculty of Actuarial Science

and InsuranceCass Business School

Presentation of Paper

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Flexible and affordable ways of paying for long-term care insurance

Les MayhewBen RickayzenDavid Smith

Faculty of Actuarial Science and Insurance Cass Business Schoollesmayhew@googlemail.com

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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

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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

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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

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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

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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)

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Retirement objectivesApart 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.

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£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

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Segmented income-asset map of the 65+ population

Contours represent people with the same levels of wealth based on income and assets

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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

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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

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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

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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 paid2. After becoming moderately disabled3. After becoming severely disabled (having been previously

moderately disabled)4. After becoming severely disabled (having not previously

been moderately disabled)

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Care pathways

Schematic of the possible care pathways. Does not include case where person dies before needing care

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Illustrative exampleAn 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 annumValue of benefit when severely disabled £25,000 per annum

No payments when insured person is in good health

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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

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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

1 The number given in this column 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.

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.

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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

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Incentives to purchaseHere 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

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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

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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

Jules ConstantinouRegional Manager, Gen Re Life/Health UK & Ireland,

representing the Institute and Faculty of Actuaries

Responses from Discussants

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Brian FisherLong Term Care Marketing Manager, Aviva/Friends Life

Responses from Discussants

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Steve LoweGroup Communications Director, Just

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Discussion

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Close

Baroness Sally GreengrossChief Executive

International Longevity Centre - UK

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