Retiring soon, the client’s portfolio looks good. New property bought in the country and selling London home will provide a useful cash lump which could generate income from deposit rates only slighty higher than now. Better rates available with a half step up in risk but still staying in the low-risk category and miles away from the volatility of equities. Bond prices are weakening, hard for people who considered them a safe alternative to equities, and likely to get weaker if (surely when?) interest rates rise in a year or two, in response to inflation.

Children will need to be supported for a while yet and will need some help with a deposit. Family Gifted Deposits are strange beasts with lenders as some seem to hate them rather than see it as an opportunity to get another customer. A deposit of  25/30 per cent is quite a large cushion against further property price falls from a lender’s point of view, and no one just starting out on a career is going save anywhere near that portion of the purchase price. The portion of first-time buyers (FTBs) has been declining for years pointing to lower long-term house prices. When the FTBs move, who will buy their property if not everyone’s parents can provide a huge deposit?

All looks fine apart from the gremlin of health. Less of it and care/treatment has to be paid for. Some basic care can be done by a partner or someone can come in for a few hours a week from local agency and wage rates here are not exactly high. Common reaction at this stage in a client meeting is “But I have BUPA!” Yes, but private medical insurance is for acute conditions i.e. ones which are curable. Chronic or incurable conditions are not covered. Many employees have  BUPA via their employer which is cheaper than buying it individually and allows people in < perfect health to get cover they could not get otherwise. Most (but some like Pruhealth do not) have a continuation option whereby cover can be maintained as an individual policy after leaving employment. This will cost more but at least cover will be maintained.

Back in the office, the promised quotes for pre-funded long-term care insurance (LTCI) are interesting. This cover is taken out while you are healthy and benefit is paid on mental or physical disability – maybe 3 or 6 months after diagnosis. Having a longer deferred period is cheaper than a shorter deferred period, and gives the person covered a chance to receover. But the cost is high: 12 per cent of the benefit for the male and 18 per cent of the benefit for the female. In money terms, monthly premium is £120 for £1,000 monthly benefit for my client and £180 per month premium for his spouse. Huge disparity in cost is actuarial – women live longer than men (about 4 years on average) and a visit to a care/nursing home will probably show 80 per cent of the residents female.

Compare the cost of whole of life insurance for same client (not yet 60) where the (annual rather than monthy) cost range is:

• for husband: <1% – 2.8% p.a. of the sum-assured for death cover i.e. £995  to £2,800 total annual premiums for £100,000 death cover
• and 2.7% – 3.1% p.a. of the sum-assured for critical illness cover i.e. £2,700  to £3,100 total annual premiums for £100,000 critical illness cover.
• for spouse: 1.15% – 2.9% p.a. of the sum-assured for death cover i.e. £1,150 – £2,900 total annual premiums for £100,000 cover
• and 3.7% – 4.8% p.a. for critical illness cover i.e. £3,750 – £4,880 total annual premiums for £100,000 cover

The LTCI rates will probably stay high until someone else sees a profit opportunity but the one insurer still offering this cover has had the field to itself for sometime and I am not holding my breath for any new entrants into this market – would really love to be proved wrong here! Commercial Union (now part of NU or AVIVA) were the first to offer this cover back in 1992 but they and their competitors bailed out when reinsurance rates went up 200 per cent in one year. People who wanted cover left it soooo late before applying that it was a question of when there would be a claim, rather than if. The cover can only be bought by IFAs with the requisite CF8 qualification nor you cannot buy this cover directly from the insurer. Harking back to my previous rant about annual general insurance contracts, http://www.georgeemsden.co.uk/2009/05/smarter-than-the-average/ the LTCI contracts bought years ago are still in effect provided the premiums have continued to be paid.

Why bother with LTCI? Simple, it will protect your capital as a quick look at care home fees in the West Country showed rates of £700 – £750 a week (excluding nursing care) – something that will clear up a lot of Inheritance Tax bills. Once you are eating into capital to pay care bills, it has a tendency to evaporate rather quickly and the new notional capital rules were announced only days ago. If you are in hospital, care is paid for by the Local Heath Authority. Pass through the hospital doors and any follow up care is in the hands of the Local Authority something they never really wanted. The increasing cost of all of us living longer was off loaded from the Health Service to the Local Authorities back in the nineties but in response to their squeals, they were and are are allowed to apply a means test – the aforementioned notional capital rules – seem to sounding a bit like Mr Micawber* here.

Starting at £24,000 in England and getting less  should entitle you to having part of the cost of care covered by the Local Authority, down to all the cost if assets are < £14,000, but interpretation of the rules varies widely. But after a rewarding professional life, would you want to risk ending up in a council-funded nursing home??

* a character from Charles Dickens’ (CD) slightly autobiographical novel David Copperfield (initials reversed – DC).    Most famous quote in the book is:

Annual Income Twenty pounds, Expenditure 19 pounds 19 shillings & 6d, result happiness. Annual Income Twenty pounds, Expenditure 20 pounds & 6d, result misery.