"This is because the means-test will take this additional income or capital into account so it would merely replace some of what local authorities would have paid.
"If a hypothetical insurance product or long-term savings product pays out a stream of income or a lump sum when an individual needs care, the local authority reduces the financial support that the individual would otherwise have been eligible for. Some of the insurance payout would in effect be deducted by local authorities."
The more a person benefits from means-tested support, the more of their insurance payout they would lose, the ABI found.
The only people who would fully benefit from the insurance payout would be those who do not fall under the means-test for their entire care journey, the trade body said.
This means just over a third of retirees would see the full benefit of income or capital. For younger generations, this reduces to 28-29 per cent.
To address these challenges, the ABI has recommend that the government exclude or simply disregard from the means-test any payouts from insurance products that cover the need for long-term care.
"Our initial analysis is that excluding such payouts from the means-test is likely to have little or no impact on government expenditure," the ABI explained.
"The same proportion of people would rely on local authority support whether or not payouts are excluded from the means-test assessment."
The trade body also recommended scrapping or limiting tax on pension withdrawals if funds are used for care-related purposes, excluding payments arising from care insurance products from means-test assessments from local authorities, and reforming advice rules to allow more personalised guidance.
'Vital means-testing system doesn’t create disincentives'
Some in the industry have echoed the ABI's recommendations. Head of retirement policy at AJ Bell, Tom Selby, said it is "vital that the means-testing system doesn’t create disincentives for people to fund their own care needs", a risk he said was clearly outlined in the report.
“This constant kicking of the can down the road is a nightmare for those looking for certainty over how much their care might cost," said Selby
"It also risks putting off financial services firms who might offer long-term care products.
"However, one potential silver lining is it provides a window of opportunity to consider whether there are features of the existing system that could be improved ahead of the delayed introduction of the cost cap."
The Department of Health and Social was approached for comment.
ruby.hinchliffe@ft.com
