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Protection for life stages: Middle-aged couples

14 August 2019

Bob and Mary are in an enviable financial position, but have concerns about care costs dwindling the estate they have carefully built for their beneficiaries. What options do they have?

Older couple dancing

Bob and Mary have a comfortable existence: they are debt and mortgage free and, on top of their pension income, they have a significant investment portfolio. Plus, Mary is set to start receiving her state pension in five years' time.

Both sets of parent have passed and Bob and Mary saw the effects of the cost of long term care on the remaining estates which they inherited. They don't want this to happen to their estate, which they have worked hard to accumulate to give their children a helping hand.

So let's look at how the funding of long term care works in the UK at present.

Those with more than £23,250 in capital and savings will pay for all of their care needs, while those with less than £14,250 won't need to contribute at all. Anyone in between will make a contribution based on a complicated formula.

According to charity Independent Age, on average older people stay in a residential care home for 30 months, at an average cost of approximately £32,000 per person for the first year, and increasing over subsequent years, coming to a total of about £82,000 over two-and-a-half years. It adds many people could end up paying much more than this.

There has been plenty of speculation over the last five years about possible changes in care cost calculations.

The original rationale for the social care green paper, which was first due in 2017 but has been postponed on numerous occasions, was to explore the issue of how social care is funded by recipients, and a number of policy ideas have reportedly been under consideration, including:

•a more generous means-test;
•a cap on lifetime social care charges;
•an insurance and contribution model;
•a Care ISA; and
•tax-free withdrawals from pension pots.

A possible solution

One possibility for Bob and Mary might be to take out whole of life policies based on the estimated average cost of staying in a nursing home.

By writing the policies in trust for the children, the sum assured would be outside of the estate for IHT purposes, regardless of whether it was actually needed to recompense the estate for the cost of nursing home fees.

Another option they may wish to consider is using convertible term assurances.

The premiums would be significantly cheaper until they were 84 - which is approaching their normal life expectancy - and they would have the option to convert to a whole of life policy without medical evidence if they still needed the cover after age 84. Naturally the premiums would increase at this point but would be offset by the savings made in the previous years.