The Association of British Insurers (ABI) is calling for payments from insurance products including lifetime health and social care cover to be excluded from local authority financial assessments under government’s plan for health and social care in England.
It is also raising concerns over whether such cover and products would fail fair value tests under the Consumer Duty, set for rollout later this year, and warned the reforms would create a ‘significant’ disincentive to developing suitable products.
Analysis undertaken by the Pension Policy Institute (PPI) for an ABI report found two thirds of people with lifetime health and social care cover in place were set to receive less financial support under the new rules.
Under government’s social care plan unveiled in September 2021, means-tested support provided by local authorities will be expanded along with the introduction of a lifetime cap on personal care costs of £86,000. However this does not include residential costs.
The threshold was set for 2023 before the delay of the reform was announced by government until 2025. The increase in the means-tested thresholds aims to make more people eligible for local authority financial support and, as a result, keep more of their assets.
The care cap was intended to prevent some people from facing “catastrophic” care costs, especially those who require more care over a longer period of time.
However, those who receive means-tested support take longer to reach it or are less likely to reach it at all, dependent on the levels of their income and savings.
The ABI commissioned the PPI to analyse the impact of the reform on the costs to individuals in different financial circumstances in its report Prepare for Care which was released last week.
The analysis tests the impact of an insurance or long-term savings payout on people with different incomes and wealth, and found the reform would create some “unintended” consequences which affects the scope and potential for product development.
It explains if people receive additional income or capital from an insurance payout, or from another source such as savings or inheritance, it may not leave them with more remaining income for personal expenses or extra cash to top-up for better care facilities.
This is because the means-test will take this additional income or capital into account so it would merely replace some of what local authorities would have paid.
The extent to which people would see the benefit of the extra income or capital would depend on their income and wealth.
‘Significant’ barrier to products
In the report the ABI warned the reforms would see two thirds of the population receive less financial support for social care from their local authority if they had an insurance or long-term savings policy than without one.
This is because the local authority would consider any payment from a policy as part of an individual’s income.
Consequently, their local authority support would be reduced or even cancelled and only a “very small” group of people, mainly those with an already high level of income or savings, would see the full benefit of a pay-out.
The ABI warned that this poses a “significant” barrier to making such products available, as providers would not want their customers to lose the benefits of the product and it also raises regulatory concerns as it would only partially benefit a customer and is likely to fail regulatory ‘fair value’ tests under the upcoming Consumer Duty.
Consequently, to address this, and to encourage the development of new products, the ABI is recommending that these payments should be excluded from local authorities’ financial assessments – a policy which it estimates will be “fiscally neutral”.
The ABI did not recommend excluding all pensions and savings products, as this would begin to negate the means test, but suggested other ways to remove disincentives to use a pension to pay for care.
These included the option for the continuation of a critical illness, income protection or life assurance policy or part of it – to insure against the risk of disability in later life or against inability to perform a number of activities of daily living.
Other options werecare gap or top-up insurance to help pay specifically for care that is unmet by local authorities, whole of life policies with a care rider, and income protection for carers.
It also suggested creating a family care insurance product – this does not currently exist but would enable family members to pay premiums directly to receive a lump sum or income if, for instance, their parents needed care.
Yvonne Braun, director of policy, long term savings, health and protection, at the ABI, (pictured) said: “The social care reforms announced by the government in 2021 could go a long way to help more people cover their care costs.
“Many people will want care services above and beyond what can be provided by their local authority. Insurance or pension pay-outs can help people afford top-up payments for additional services.
“However, as it stands, most people would actually lose out if they were to buy an insurance or long-term savings product to prepare in advance.
“This research has identified changes which would help more people benefit in full from an insurance or long-term savings product. The delay to the reforms presents an opportunity to ensure that the new rules work in practice and benefit as many people as possible.”