Flexible and Affordable Methods of Paying for Long-Term Care Insurance

Abstract

With the expected dramatic increase in the number of older people requiring care, and the tightening of public funding, individuals will be increasingly expected to contribute to, and plan for, their own care in later life. However, history shows us that people are very reluctant to save for their care to the extent that there are no longer any providers of traditional prefunded long-term care insurance products in the United Kingdom to help address this problem. In this article, we consider a a disability-linked annuity that provides benefit payments toward the cost of both domiciliary and residential nursing care. We investigate different ways in which individuals can purchase this product with the goal of minimizing the impact on their living standards, hence making the purchase of the product more palatable. In addition to the traditional methods of purchasing insurance out of income and savings, we show that this product can also be purchased by making use of assets such as residential property. This flexibility would allow individuals to have control over the timing of their payments to fit around their lifestyle, particularly for those with low retirement incomes. It follows that some people will be more attracted to particular payment methods than others, and a framework is presented that segments people according to individual circumstances. A model is developed showing how the annuity works and how premiums are calculated.

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Notes

1 Unlocking the Potential, DEMOS, 2014, http://www.demos.co.uk/files/Unlocking_potential_-_web.pdf?1393180449

2 Income is defined as personal income plus imputed income from assets less a personal allowance of £24.40 per week (for further details see Mayhew 2017).

3 See https://www.covermagazine.co.uk/cover/news/3012359/national-friendly-introduces-assisted-living-insurance-product

4 http://webarchive.nationalarchives.gov.uk/20130221121529/https://www.wp.dh.gov.uk/carecommission/files/2011/07/Fairer-Care-Funding-Report.pdf

5 Taken from the Actuarial Post: http://www.actuarialpost.co.uk/news/retirees-desire-to-leave-inheritance-weakening-3697.htm

6 English Longitudinal Study of Ageing: http://www.elsa-project.ac.uk

7 Note that net negative assets are also possible, e.g., as a result of outstanding mortgage debt, although this is a relatively rare occurrence.