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Care insurance

Forever young

Nobody wants to insure themselves against the cost of end-of-life care

GOOD news for cruise ships: the ranks of the over-65s grew by 1.4m over the past decade. But old age will not be kind to all of them. One in three will develop dementia, around one in six will end up in a nursing or care home and nearly half will need some form of care. Few will have laid plans to pay for it.

The average stay in a nursing home lasts 17 months and costs 57,000 (85,000) according to the Centre for Economics and Business Research, a think-tank. People with assets under 23,250 get most of their residential care paid for but everyone else is more-or-less on their own, with the unluckiest facing bills as high as 200,000. Ever-attuned to the plight of elderly voters, the government is moving to change that. Next year it will put a cap of 72,000 on the sum that a person will have to pay towards care, and will raise the means-testing threshold from 23,250 to 118,000.

The government had hoped that this reform would not just soothe elderly nerves but also stimulate an insurance market for end-of-life care. Unfortunately, that is not happening.

Many people continue to assume, wrongly, that the NHS will pay, says Yvonne Braun from the Association of British Insurers. And most are overly optimistic about their health in old age, underestimating the risks and costs they will suffer. Joan Costa-Font, from the London School of Economics, adds that the idea of care insurance seems to conflict with social values. A kind of familial moral hazard kicks in, as people fear their children will no longer look after them if they are insured.

Care costs are so hard to predict that insurers tend to protect themselves with big premiums, making insurance unaffordable. The government's new cap, which was supposed to sort this out, comes with alarming caveats. It does not include the cost of bed and board, which makes up a large chunk of care home costs. It is also up to local authorities to determine which care counts towards the cap, meaning people may end up spending more after all. And the cap is higher than the 25,000-50,000 recommended to the government by Andrew Dilnot, an economist who reviewed the market.

According to the Institute and Faculty of Actuaries, the real maximum of self-funded costs might be around 140,000. “Like the rest of the industry, we couldn't make it pay,” says Stephen Lowe from Age UK, a charity that also sells insurance.

If a care insurance market fails to materialise, alternatives will be available. Worried middle-aged folk might take out immediate-needs annuities, which give fixed care payouts for life in return for a lump sum. Some insurers are starting to offer a care element as part of their life-insurance policies. Zurich Insurance, one of Britain's largest insurers, looked into offering care-only insurance but found that people much prefer a guaranteed payout over the “risk” of not needing care and losing their premiums altogether. From next month it will offer a new policy that allows people to withdraw a portion of their life insurance, which normally only pays out at death, as soon as they need care.

From next month much will change for retirees, as the government drops the requirement to buy annuities with private pension pots. The government hopes that people will use the new flexibility to plan for their old age, including the possibility that their final years will be spent in a nursing home rather than on the Costa del Sol. But Richard Sadler from Zurich points out that most people do not even save enough for retirement—something they are fairly certain will happen and even look forward to. It is less likely they will save for long-term care, which they think and hope they will never need.