This enables financial advisers to undertake inheritance tax planning for their clients without worrying about the client running out of money.
Some families will be concerned about the perceived financial loss should the policyholder die shortly after the product has started. To mitigate against this, people can choose capital guarantee options which can result in some of the premium being refunded if a person dies within a defined period.
A variation on this theme is a deferred needs annuity whereby the policy starts paying a benefit two or three years after the person enters care. These care plans have a lower premium than immediate needs versions and can be seen as ‘insurance’ against someone outliving their assets.
Alternative
Rather than purchasing a guaranteed income solution, an alternative is to generate unsecure income using the investment returns from products such as bonds or to start spending savings to meet the cost of care.
This option enables the adviser and the family to retain control of assets but it does expose the customer to asset depletion should they live for an extended period.
Many people in later life have significant housing equity so using this may be the only option open to some. Outright sale, renting the property out, equity release or a local authority deferred payment agreement are among the most popular ways in which this can be done – however, each option should be considered relative to a client’s individual circumstances.
If your client’s partner has passed away or they are single, selling the property may be the simplest way in which to gain access to this wealth.
Admittedly, they may well have an emotional attachment to the property but – even with a letting agent – renting a property out can be more work than they or their families may feel capable of in later life.
Deferred payment agreements are an option that local authorities offer but they do come with certain caveats which can restrict their use. Firstly, the person needing care should live alone and not share the property with a spouse or dependents.
They also need to have assets less than a certain amount (generally - £23,250) excluding the value of the home and be moving into care permanently – rather than on a temporary basis.
If these and other criteria are met, then the council can choose to offer a deferred payment agreement - essentially an interest bearing loan secured against the value of the property used to pay for care. The local authority loan is repaid when the property is sold.
