Long Term Care

Insurance to cover long term care has long been a feature of financial services in the USA. But it wasn't until 1992 that the cover was launched in the UK. Long term care benefit may be used to provide care, either at home, or on a part-time or full-time basis in a residential or nursing home. Average annual nursing home costs are now estimated at around £24,000 a year for full time care.

In 1993, the Government introduced the Community Care Act which radically changed the way in which state long term care is paid for in the UK. The Act provided for the transfer of responsibility as to who should receive state care from the National Health Service to local authorities.

To qualify for aid, you face a means test. Your assets, which may include your home (although not in all circumstances) must be used to pay towards the maintenance of your care. If your total assets are worth more than £20,000 in England (£19,000 in Scotland, £20,500 in Wales) then you will receive no assistance.

If your assets are worth between £20,000 and £12,250 in England (the lower limit in Scotland is £11,750 and in Wales £13,500) then you will receive aid on a sliding scale. Only when your assets fall below the lower limit will your local authority meet the full care costs.

Your home will not be included in the calculation of your assets if it continues to be occupied by your partner. Other factors may also apply. There is a highly prescriptive list of reasons that would allow the local authority to disregard property. You may also reduce your assets by placing them in trust, remaining the beneficial owner but not the legal owner.

The alternative to having your assets eaten up by care costs is long term care insurance. Such policies pay out when the insured party can no longer perform a number of daily living functions without the aid of another. Although the requirements will vary dependent upon the company chosen to underwrite the benefits, the typical plans cover the following prime daily functions:

• washing and bathing
• food preparation
• feeding
• continence
• dressing
• cleaning
• use of toilets
• ability to transfer from a bed to a chair or wheelchair
• mobility (the ability to move indoors from room to room)

Most insurers will require the insured party to be unable to carry out two or three functions before the policy pays out.

Regular premium long term care insurance does not usually create any cash value and as with car insurance, if you do not claim, you may lose the value of the premiums. However, with plans utilising lump sum investments the residual value of the initial investment will form part of the policyholder's estate on death. Any such residual value may be left in trust and thus excluded from the estate for inheritance tax purposes.

Some plans pay out benefits based on an annuity arrangement which taxes payments in the same way as an annuity with the capital content being tax-free and the balance classified as income and taxed at the basic rate of tax.

However, a number of plans will pay directly to a nursing home and the Inland Revenue has stated that in this case there will be no tax liabilities.

Last Updated: June 2007 © Moneyextra.com

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.