Paying for Care Costs in Later Life Using the Value in People’s Homes

Paying for Care Costs in Later Life Using the Value in People's Homes* 0 Les Mayhew , David Smith 1 DEMOS Unit 1, Lloyds Wharf , 2-3 Mill Street, London SE1 2BD, U.K 2 Faculty of Actuarial Science and Insurance, Cass Business School , 106 Bunhill Row, London EC1Y 8TZ, U.K With the number of U.K. citizens aged 75+ doubling to 10 million by 2040, and with 1.3 million people already receiving social care services in England alone, social care funding is a key public policy challenge. The government has launched a set of reforms designed to get social care funding onto a sustainable footing by establishing a new level for what individuals and the state will pay. The reforms are designed to encourage individuals to explore how best to use their available wealth and assets to meet care costs through a mixed system of local authority and private sector care-funding options. One option is to use the value in the home to bridge the cost between out-of-pocket costs and care home fees. In this article, we consider two new fi nancial arrangements designed to meet the needs of people in different fi nancial circumstances based on releasing equity from the home. These are an equity-backed insurance product and an “equity bank” that lets a person draw down an income from their home. The Geneva Papers (2016) 0, 1-23. doi:10.1057/gpp.2015.34 long-term care equity release; insurance; income drawdown Introduction Owing to increasing longevity, the number of U.K. citizens aged 75+ will double to 10 million by 2040 with the result that the demand for social care will increase signifi cantly.1 If extra longevity is spent more in bad health than in good, then the consumption of social care per person will also increase.2 Unlike health care, an individual is expected to pay for his or her own social care in the U.K., although some support is available to those least able to pay. If long-term care is required in a nursing home, a typical pension income would not cover the fees, in which case, some will be forced to sell their homes or defer payment until after death. * This paper draws on two previous research publications: Mayhew and O’Leary (2014) and Mayhew and Smith (2014a). 1 Karlsson et al. (2006 a, b); Forder (2007); Karlsson et al. (2007) ; Wittenberg et al. (2008 a, b); Mayhew et al. (2010); Appleby (2013) . 2 For discussions of this point, see Mayhew et al. (2010) and Jagger et al. (2007) . The Geneva Papers on Risk and Insurance—Issues and Practice 2 The problem of how to pay for care is not confi ned to the U.K., but is a major policy issue throughout the developed world.3 The level of support individuals can expect from the state vs the amount individuals should contribute themselves has therefore become a key issue in a debate spanning many years.4 In the U.K., some important decisions have already been taken, including the passing of the Care Act in 2014, which placed new duties on municipalities (i.e. local authorities) including an assessment of an adult’s need for care and support. Following on the recommendations of the Dilnot Commission, a key element of the legislation is to put a cap or limit on out-of-pocket care costs.5 After due consideration, the government decided to set the cap at £72,000 (equivalent roughly to 2–3 years in a care home), after which the state would pay. The cap only applies to the care element of care bills and not to accommodation costs, which individuals will continue to pay for out of pocket. This means that many could face bills estimated at well over £140k before they reach the cap,6 which is way beyond the reach of most people. Administration of the cap itself is complex, which is why the date of introduction of the cap has recently been put back from 2016 to 2020.7 Although not everybody will need to pay for care in their lifetime and therefore have bills of this magnitude, it remains a signifi cant risk for individuals and their families. It is estimated, for example, that around 30 per cent will need long-term care at some point in their lives and, of these, 16 per cent will reach the cap.8 We also know that a typical pension income will not be suffi cient to pay care home fees without state support so that most people will struggle to fi nd just a fraction of the costs, even if they draw down all their savings. The problem is that people are reluctant to set money aside for care, some falsely believing that their care as well as medical needs will be met free of charge by the National Health Service (NHS); even if they did save, it is unlikely that they would accrue the sums required. Most older people in the U.K. own their own homes, and so, using their value to help pay for care is one potential solution if it is planned correctly.9,10 The most common way of releasing equity is through downsizing to a smaller home (usually at around retirement age) with the money released being used to fund lifestyle changes and to enhance retirement income. The cos (...truncated)