Protection providers could look to design a long-term care insurance policy that bolts on to income drawdown in order to relieve government funding and help individuals fund future care costs.
The UK is trying to find a solution to the challenge of long-term care. The topic featured prominently in party manifestos during the 2017 general election, and the government is due to produce a green paper on the issue in 2018.
The issue of funding long-term care desperately needs addressing, given that the UK’s population is aging rapidly while resources for care provided by the state are falling. A sustainable approach must be found so individuals are not left vulnerable if they need care in later life.
There are two possible solutions: either individuals save towards the cost of care or they insure themselves. At present long-term care is not a large insurance market, but it could be the answer.
Former pensions minister Steve Webb, now at Royal London, suggested the solution of bolting a long-term care insurance product alongside income drawdown at Life Insurance International’s 2017 Innovation Forum. This idea has a number of benefits:
1) Selling is easier alongside an existing product – A barrier to uptake of protection products is that people do not believe they will need them, due to a “head in the sand” mentality. Selling cover alongside an existing product is therefore an effective and convenient way to reach and sell to individuals.
2) More individuals are opting for income drawdown – Since the introduction of pensions freedoms fewer individuals are buying annuities. Pensions are also moving away from defined benefit towards defined contribution, meaning more individuals will likely opt for income drawdown in the future. This makes income drawdown the prime product to sell long-term care insurance alongside.
3) Tax alignment – Money stored inside a pension is already tax-free. If the government makes it possible to move money from income drawdown to a long-term care policy without incurring tax liabilities it would become a more attractive option for individuals. Protection insurers and the government should work together to create a viable solution.
4) It targets individuals at the right time – Individuals opting for income drawdown will be around 55, and are thus the right demographic to target with long-term care products. Individuals would have 25 to 30 years to build up premiums to pay for if they need care. It would also mean providers would have around 25 to 30 years of premiums to invest.
5) Guaranteed benefit – This type of insurance product would need to offer a guaranteed benefit to be appealing. It should be marketed so that if an individual does not claim for the cost of care the policy instead pays out for their funeral.
There are many benefits to this proposition, which represents an opportunity to create a new insurance market while also providing a solution to the perpetually growing issue of long-term care. Protection providers should look to implement it within their product ranges going forward.
By Danielle Cripps, General Insurance Analyst