The role of private insurance in the future funding of long-term care

Private insurance is likely to figure in any reform of long-term care funding. Chris Horlick's firm is waiting, he tells Mithran Samuel

Private insurance is likely to figure in any reform of long-term care funding. Chris Horlick’s firm is waiting, he tells Mithran Samuel

Chris Horlick is well aware that presenting the financial services industry as the solution to the long-term care funding problem is not an easy sell.

“People have heard a lot of unpleasant stuff about mis-selling,” says the managing director of care at Partnership, one of the leading insurance providers. “There’s the idea that we must be nasty fat cats trying to make money out of people who need care.”

However, he believes strongly that private insurance will form a key part of the solution to the increasing gap between the need for care and the state’s ability to fund it.

“The demographics are going up at a time when the means to pay for it are going in the opposite direction.”

He points out that 41% of residential care users are already self-funders and this proportion is likely to grow.

Advantages of private finance

The body charged with finding a solution is the government-appointed Commission on the Funding of Care and Support, chaired by Andrew Dilnot.

At this month’s National Children and Adult Services Conference, Dilnot denied the commission was leaning towards private insurance.

However, Horlick believes that it has strong advantages over rival options.

“The dangers of going for something like the Scottish system – where free personal care is funded out of general taxation – are pretty clear when you look at what’s happening there in terms of rising costs. The Treasury will be very aware of that.”

He feels similarly about a compulsory insurance system, in which levies are either collected from people’s pay packets or, as proposed by the last Labour health secretary, Andy Burnham, through people’s estates.

“My view is that it’s very unlikely that the coalition government will go down the road of a compulsory levy. I’m not sure the country would wear it.”

Unaffordable for most

The traditional argument against private insurance is that is unaffordable for most.

Partnership’s average premium is £80,000 for one of its immediate care plans, for people at the point of needing care.

While this sounds steep, Horlick says it makes sense for many existing self-funders. On average, his customers spend four years in residential care, facing costs of up to £40,000 a year in London and the South East.

They also have household wealth of about £240,000 on average, he says, so buying a protection plan is a way of safeguarding two-thirds of their children’s inheritance.

Insurance customers fill out an application form following consultation with a financial adviser and then the provider requests a report from the GP and the care home to determine the premium.

While those expected to live longer in a care home face a higher premium, Horlick argues that going without insurance can often be more costly.

“We know of a couple who got through £670,000 in care bills. When we looked at their situation retrospectively we would have given them a premium of £310,000. They could have left £360,000 to their estate. There would have been inheritance tax on that. It may have helped their children pay for their own care.”

He cites the case of another customer, whose mother entered care aged 92, to show the flipside.

“The cost was £46,000 a year. He went away saying that if she did not die soon it would bankrupt him. By chance he heard about an immediate care annuity. His mum died 10 years later. It would have bankrupted him.”

While the market for such plans is growing, a lack of financial advice is a key barrier to bigger take-up, says Horlick.

“People don’t plan to receive care. It’s typically a semi-catastrophic situation. A recent Counsel and Care survey said 60% of people turn to the internet [for advice].”

He says that local authorities are failing in their signposting role, by not directing people towards sources of specialist financial advice, ideally from members of the Society of Later Life Advisers.

However, cost is still a barrier: £80,000 is well above the £23,500 asset threshold above which people must fund their own care in England, putting it beyond the reach of those many who do not receive public funding.

Dead market

People would face lower premiums if they insured themselves in advance of needing care, so long as there was sufficient take-up. However, Horlick says the market in pre-planned insurance is “dead” due to lack of demand.

Reviving it requires a national debate to address public ignorance about the cost of care and government help, such as tax relief, he says.

This, broadly, was the Conservative party policy going into the election: that government would promote a market in pre-planned insurance, with premiums of about £8,000, paid on retirement. This figure has been derided as a significant underestimate, with the centre-right think-tank Policy Exchange putting it closer to £40,000.

However, it shows how far Horlick’s message is in tune with the government’s. Since the election, the industry’s stock has, if anything, grown. Horlick has been appointed to Westminster Council’s social care commission which will examine how the authority will meet its future care challenges, while financial services experts are also due to feed into Dilnot’s commission. No wonder Horlick is confident.

“I’ve had pretty strong indications from ministers that it would be inconceivable that the funding solution they come up with will not include an enhanced role for the financial services sector.”

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