30th January 2023

Planning for elderly care might not be a cheery topic for an adviser's client, but it is certainly a pertinent one. In 2021-2022 there were an estimated 360,793 care home residents, with 125,954 funding the cost themselves- this number will only rise over the coming years.

The costs are also mounting. It's not unusual for care home fees, particularly with nursing included, to cost more than £50,000 a year. This often requires clients to sell their house and deplete the inheritance they planned for their family. Financial advisers should know that it doesn't have to be this way and care annuities could provide an effective solution.

What is a care annuity?

A care annuity (also known as an immediate or deferred needs annuity) is an insurance that exchanges a lump sum of money in exchange for a regular income that contributes to a person's long-term care home costs. The main benefit is that it gives certainty to the individual; whether they need care for 1 year or 30 years, they will be covered. The insurance can also protect against the mounting cost of care and mitigate against the impact of inflation, which is important now more than ever before.

Joel Brown, Business Development Manager at National Friendly says: "For someone who is looking at their parent going into a care home, they can decide between the risk of spending all of mum or dad's inheritance on care home fees or purchasing this product where they have got some control on future costs." 

However, while the control the product offers is a benefit to clients, there are also risks. If a client requires care for a significant time, the product can prove to be excellent value. Conversely, if a client only lives for a short time after purchasing the policy it can represent a poor return on investment given the significant outlay.

Martyn Love, Head of Risk & Strategic Projects at National Friendly, explains that historically, care annuities have not been a widely bought product due to the high upfront cost which can average around £150,000.

Love says: "Often people are worried they're going to get it wrong, that they're going to lose all of their loved one's money through taking the wrong option by selecting an annuity. It is only natural. If I was faced with the same choice, I would be going through the same process."

However, some steps have been made to help mitigate the downside potential. For instance, customers can also purchase a capital protection option to protect a proportion of the money paid should they pass away earlier than expected. Some providers have also included a Covid guarantee, so if the death occurs within the first year after purchase, and Covid appears on the death certificate, the fees for the annuity minus the care home cost will be passed on to the beneficiaries.

The role of advisers

Given the complexity of the topic and the emotion attached to the decision-making, having an independent financial adviser (IFA) explain the options would be extremely valuable. Love acknowledges that often IFAs don't have the conversation about care home funding since other investments might be easier for people to grasp. There is also the fact that advisers might be worried about being on the hook, should a family member pass away early - however, it is a risk IFAs should take for the benefit of their clients.

Brown adds, "It's often down to the IFA to bring it up as an option to fund care fees.  It's not the individual that goes to the IFA saying they've heard of care annuity."

Clients should be encouraged by advisers to start these family discussions about later life care as soon as possible, to avoid the raw emotion when the circumstance becomes a reality. These conversations then facilitate bearing in mind what the client wants, and how it will impact their surrounding family. The sooner these family discussions happen, the more certainty and ease will come out of the process.

While care annuities might not be an option for everybody given their substantial cost, there are many people for whom it is a viable choice and all they require is education. The process doesn't need to be complicated, with all providers being able to show multiple, comparable quotes.

Crucially, care home costs are a family conversation that will only become more prominent as populations age and healthcare costs rise. The sooner advisers instigate these conversations, the better for their clients.

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