A high price for peace of mind

John Chapman wonders if long-term care insurance is worth the hefty premiums

Most of us will move quickly from independence to dying. Some, however, will go through a period of needing care. The costs of such care may be substantial. Annual charges at residential homes vary between pounds 15,000 and pounds 20,000, while nursing homes charge between pounds 20,000 and pounds 25,000 a year.

Since the passing of the Community Care Act in 1993, local authorities can take the costs of such care from a person's income, and from any assets above pounds 10,000. Unless you have a spouse or an aged or incapacitated relative living with you, even your house could be taken to cover care costs.

What are your chances of needing care? The position is not clear. Insurers speak variously about the likelihood being one in six or even one in four. A more neutral estimate comes from Richard Best in a paper by the Rowntree Foundation: "There is only a one in 20 chance that you, on reaching pensionable age as a man or a woman, will require residential or nursing care. Even if you live to 80 or 85 the chances are only one in four or one in five."

The average spell in a residential home is three years and in a nursing home about eighteen months. Yet a minority of those needing care live for much longer periods and the effect on their assets can be dramatic.

What can we do? Nothing, is one option. If your family is well off they may not need your assets. Alternatively, your family may look after you. This is quite common. Love and duty are no doubt the main factors, but there is now an interest in preventing inheritable assets being swallowed up by local authorities. A further option is to give your assets away. There is little sense in becoming the richest man in the churchyard, particularly when your children have real needs. But gifts obviously given to avoid care costs could be clawed back by the local authority.

Finally, there are "long term care" insurance policies (LTC). There are about a dozen pre-funded policies, but the premiums are substantial. To purchase cover of pounds 1,000 a month a man aged 55 might pay premiums of pounds 50 to pounds 70 a month, rising to pounds 80 to pounds 130 a month by age 70 (before inflation). For women, premiums are a third higher. There are also "immediate cover" policies, which provide impaired lives annuities - annual income paid out to people who are ill and may die within a short space of time.

These might cost pounds 35,000 to pounds 40,000 for men, and pounds 50,000 to pounds 55,000 for women. Payouts under such policies are only triggered if you fail tests on two or three activities of daily living - mobility, washing, dressing, feeding, toiletry and continence.

With such charges, it is no surprise that the LTC insurance market has not taken off. Some 20,000 or 30,000 policies have been sold.

The previous government suggested a "partnership approach". For each pounds l of insurance cover purchased a further pounds l.50 of assets would be protected. Someone who bought pounds 40,000 of LTC cover would have pounds 70,000 protected from local authorities. New Labour has backed away from this commitment and has promised a Royal Commission on the subject instead.

Meanwhile the debate has been further confused by a decision of the courts that local authorities are not obliged to provide care if they have insufficient money. But it is difficult to envisage any local authority leaving its aged to fester.

If you are now considering the risks of facing a period of care, do not to be sweet-talked into buying LTC policies through sales-pitches about the availability of helplines, care counsellors and the like. If you are worried about the future as you get old, it is important first to talk to your family, your local social services, and bodies like Age Concern.

If you do have assets to protect, buying LTC insurance is an option, though expensive. The important thing is not to pay pounds 1,000 a year or more just for the "peace of mind" that could be obtained for nothing by other means.

John Chapman, formerly a senior official at the Office of Fair Trading, is the author of several hard-hitting reports on the financial services industry