How to share the cost of care? New solutions for an age-old problem

Three fears haunt floating voters, and all focus on the possible loss of the family home. Homes are very much at risk if the breadwinner loses his or her job and has no mortgage protection insurance. They are at risk if the owner has negative equity and cannot move because the existing mortgage cannot be redeemed. And the message is steadily sinking in that homes and life savings are at risk if elderly owners need professional nursing care.

In some ways the last is the most distressing of the three worries because local authorities will only now pay the full cost of care once the individual's assets have been reduced to pounds 8,000.

Professional nursing care at home for two hours a day can cost up to pounds 6,500 a year, and a place in a residential home can cost anything from pounds 12,000 to pounds 20,000 a year per person, so charges can quickly swallow a lifetime's savings and the family home, leaving next to nothing for the children to inherit.

With this in mind the Chancellor is expected to introduce measures next week to try and ease the situation. The simplest and most immediate reform would be to increase the pounds 8,000 threshold so that anyone needing care could keep a bigger nest-egg and still qualify for state help.

Measures to allow individuals to divert some of their pension funds to pay for nursing care may also be put forward.

An earlier attempt to offer a combined policy was launched by Cannon Assurance in 1991, allowing policy-holders, subject to passing a medical examination, to surrender 10 per cent of their pension at retirement in return for a three or fourfold increase in pension if they subsequently needed professional care at home or in a nursing home. It was squashed in 1993 by the Treasury, but a change of heart could well be coming.

That, however, would not be enough to solve the wider problem of funding long-term care. Too few people have a big enough pension pot to provide a comfortable retirement, without tapping it for other purposes.

Only one man in four and one woman in three presently ends up needing long-term health care, only one in six ends up in a home, and insurance from the five main providers, Commercial Union, PPP Lifetime, Eagle Star Life, Prime Health and Scottish Equitable European, is not exactly cheap.

Taking out a deluxe policy to provide an extra pounds 10,000 a year for long- term health care with Commercial Union will cost pounds 43 a month or a single premium of pounds 4,750 for a 55- year-old male, and pounds 48 a month or pounds 6,400 for a 55-year-old female.

Not everyone can claim. Deluxe policies will only pay out if, in the judgement of the claimant's doctor, the individual fails at least two out of six tests: the ability to wash, dress, and feed oneself, get in and out of bed, move around on a level surface and use the toilet. Standard policies pay out on three fails.

If a claim is recognised, most policies will offer home help care first, with a place in a nursing home reserved for those who have failed more of the six tests.

Some existing policies also review premiums each year so that anyone on fixed income and in deteriorating health might well find that they can no longer afford to maintain their cover just when their need is increasing. To meet this problem, CU has just introduced guaranteed benefit levels for single-premium contributions on all new plans sold to over 65s.

With an ageing population, longer-term tax incentives on premiums may be needed to promote more private provision for future needs, although the Treasury presently takes the view that long-term health- care benefits are not taxable so premiums should not qualify for tax relief.

Other suggested stopgaps include exempting family homes from the pounds 8,000 ceiling, the state paying the cost of nursing care, leaving individuals to fund residential charges, and private insurance policies funded equally by the Government and the individual.

The most interesting short-term option being promoted by Peter Lilley, the Secretary of State for Social Security, and Peter Gatenby, the top actuary at PPP Lifecare, would be free nursing home care for anyone who has paid for the first three years of care from their own resources.

Limiting the individual's liability to pay to three years would enable providers of long-term health care to reduce the premiums by as much as 30 per cent, while the Government's financial commitment would be limited by the hard fact that the life expectancy of men once they go into a home is not much more than three years, although women tend to survive longer.

The other main weakness of existing long-term health care plans has been the specialised nature of the product. If the individual dies before qualifying for care, there is no benefit at all.

Individuals who would consider long-term health care a waste of money might well go for a policy that combined insurance with an investment plan that guaranteed a capital sum to the estate if the insurance element was not drawn.

Immediately after the Budget expect to see the first of a new breed of investment-linked insurance plans to try and encourage people to take up long-term health care. If the Chancellor has smoothed the path, so much the better.