Types of Long Term Care Insurance
Types of Long Term Care Insurance
Long Term Care Insurance (LTCI) consists of three types:
- Lump sum to purchase care immediately (Immediate Care Plans)
- Pre-funded policies which are no longer around but might still be in existence
- Equity release plans
Immediate Care Plans
An Immediate Care Plan is an Impaired Life Annuity with special tax concessions: the provider assesses the future life span and quotes a lump sum premium. It is designed for people in poor health who already need care or who about to go into a care home. It will pay out for as long as the person needs the care with no time limit.
- The individual cannot cancel their policy or get their lump sum premium back except in the cooling-off period.
- The individual cannot get their monthly premiums back.
- The individual must be unable to do at least one Activity of Daily Living or must be suffering from a cognitive impairment such as dementia.
- The monthly benefits are paid tax free to the care provider registered with the Care Quality Commission.
Guaranteed Option of an Immediate Care Plan
The Guaranteed option of an Immediate Care Plan means that, if the individual dies shortly after the plan commences, all the premium aren’t lost.
Pre-Funded Investment-Linked Plan
A Pre-Funded Investment-linked plan is designed to provide long-term care funding and also some benefits after death for the policyholder’s heirs. It is a combination single premium investment bond and regular premium long -term care policy.
If care is never needed then the value of the bond is returned to the individual’s estate. This residual value will be the investment plus any growth minus the insurance premiums.
The premium needed to pay for the long term care insurance is withdrawn by the company each month from the value of the bond
Inheritance Tax and Pre-Funded Investment-Linked Plans
A Pre-Funded Investment-linked plan can be used for Inheritance Tax mitigation because, if the policyholder needs long-term care, there will be some benefits available to the policyholder and after their death for their heirs. If care is never needed, the value of the bond is returned to the individual’s estate.
If the individual seeking care has a high level of assets but a low level of income, equity release products are appropriate as long as there is no outstanding mortgage.
A disadvantage of a lifetime mortgage is that the cash received from the mortgage could reduce or remove entitlement to means-tested benefits.
Home Reversion Plan Advantages
Home Reversion Plans are only available for people aged over 65.
In a home reversion plan, cash released can be in tranches (eg, 25% followed by another 25%) and a peppercorn rent is required. However, the individual can remain in the property until death or when it’s sold.
Home Reversion Plan Disadvantages
The disadvantages of home reversion plans are that it is unlikely the individual will get the market value for the property at the time it’s arranged. Also, plans are impossible to reverse and the individual is likely to lose out if they move quickly after taking out the reversion.
The value of the property will depend on the individual’s age and scheme, reflecting how the reversion company’s money is tied up.
Find out more information about long term care insurance.