No one likes to think that they might one day need help with looking after themselves or have to live in a residential or nursing home. But as the UK population is getting older, the need for professional social care is growing rapidly. 

The percentage of people aged 65 or older in the UK has risen from 15% in 1985 to 17% in 2010, and is expected to rise to 23% by 2035, according to the Office for National Statistics. Yet while higher standards of living and advances in medicine are enabling people to live longer, two out of every three people aged 65 or over will need some form of social care during their retirement (source CMS.org via Vitality Life marketing literature).

The term social care is used to cover a wide range of support. This could mean helping someone with their shopping, preparing their food and tidying their home to assisting them with the more personal activities of daily living, such as getting out of bed, washing and getting dressed. It also includes as well as nursing care. 

Prohibitive cost The cost of social care can be prohibitive. The average annual cost of a care home without nursing is £28,500, rising to £37,500 for those requiring nursing, according to the Care of Older People UK Market Report 2013/14 by healthcare market intelligence provider LaingBuisson. Even care provided for a few hours a day within the individual’s own home costs upwards of £11,000 a year – far more than many pensioners can afford out of their retirement income.

But although there is clearly a need for people to plan how they will pay for care costs, the appetite for doing so is completely lacking. The last insurance product designed specifically to help people pre-fund their care costs was withdrawn in 2012 by Partnership, an insurance provider specialising in impaired annuities, because of lack of demand. Meanwhile, a report compiled by the insurer found that 78% of over-45s had not thought about care or spoken to their families about it. 
“There is no ‘silver bullet’ for social care insurance policy”“People do not want to believe that they will need care when they get older,” says Thomas Kenny, Head of Technical Pricing at Partnership.

Many people assume that if they do end up needing help, their families or their local authority will step in. But research by the Institute for Public Policy Research (IPPR) indicates that by the year 2030, one million people will lack adult children who can act as their carers. 

Local authorities do fund care costs for some people, but eligibility is based on means testing and the severity of need. Homeowners with more than £23,250 in assets other than their property, and who live alone, frequently face having to sell their property to meet the costs of care.

Care cap  In 2016, the UK government will implement a cap of £72,000 on the amount that individuals will have to pay towards their nursing care. It is also raising the maximum amount of assets an individual is allowed to have before they pay for their care from £23,250 to £118,000. 

But because the cap applies to nursing costs and does not include ‘hotel’ costs such as food, laundry, room cleaning and utility bills, it is expected to apply to only 15% of those needing care. Partnership has calculated that the typical English homeowner will need to spend £177,500 on care over a period of more than six years before the cap kicks in and the state contributes to their nursing costs. Even then they will still have to pay for hotel costs.

Even though the financial benefits of the cap are likely to be restricted to a limited number of people, the information campaign that will accompany its introduction is expected to encourage people to think seriously about their own future funding needs.

Product developments Currently, there is just one type of product on sale that produces an income specifically to pay care fees – the immediate needs annuity. This policy, bought with a lump sum of cash, provides an income that can increase in line with inflation or by a set amount to cover part or all of a person’s care costs. The income is regular, tax-free and does not affect qualification for any benefits, provided it is paid directly to the registered care provider. Although the initial outlay is typically high, it provides peace of mind for those in care and their families, knowing that the fees will be paid, come what may.

But people still need some way to save that initial lump sum. Just over a year ago, the Association of British Insurers (ABI) and the Department of Health (DH) set out a statement of intent about how they would work together to ensure people receive appropriate information and advice about funding social care. They also discussed how they would create the right conditions for a larger market in financial products that would help pay for social care.

Since then just one product designed specifically to meet social care costs has been launched. But this could prove to be a valuable template for others to copy: reports that Zurich is considering launching a similar product have already appeared.

The Vitality LifestyleCare Cover is a whole-of-life insurance policy that will pay out a lump sum on death or earlier if you can no longer look after yourself. Premiums are increased by an average of 30% on the normal whole-of-life cost to reflect the potential risk of an early payout, but as with all life insurance products, the earlier you buy, the cheaper the cover is, and premiums are guaranteed for life. Someone buying a Vitality whole-of-life policy with LifestyleCare Cover worth £50,000 at the age of 30 would pay £15.04 a month compared to £75.52 a month for someone aged 60.

This type of accelerated life policy has been available in the US for more than a decade, and take-up has been slow but steady, with a market penetration of between 8% and 10%, says Deepak Jobanputra, Deputy Chief Executive for Vitality Life. He refuses to comment on sales, but says they have “been in line with our expectations”.

Greater flexibility A review carried out by insurers and published at the same time as the ABI and DH statement of intent found that the products most likely to be developed and improved are care annuities, equity release and accelerated life insurance policies like that offered by Vitality Life. The radical changes that have enveloped the pensions industry for the last year may also encourage development of long-term care products, resulting in more flexible retirement annuities that provide more income when someone needs care, and similar enhancements for income drawdown.

Although many would argue that people need to start thinking about social care costs when they are young – in their 20s and 30s – Pension Wise, the free guidance service provided to people at the point of retirement, will prove a valuable way to raise the issue of social care planning with potential customers. 

Yvonne Braun, Director of Long-Term Savings Policy for the ABI, says: “There is no ‘silver bullet’ for social care insurance policy and little public appetite to buy standalone products to pre-fund future social care costs during people’s working lives. Instead, more flexible retirement income products and protection products that can convert into social care cover are likely to emerge to help people plan for care. An example could be an equity release product that allows a homeowner to stay in their home and raise a loan against it to pay for a number of years of care if needed. Of course, the amount raised against a home would vary depending on house prices in a given area.

“The Government’s incoming pension reforms will increase choice, flexibility and personal responsibility, and insurers are working flat out to be ready for their introduction. From these changes, we expect the growth in more flexible retirement income products that can help people pay for any future social care needs.”