Solving The Elderly Care Crisis Through New Financial Products

A form of premium bonds paying out prizes worth £24 million a year could help meet the soaring cost of elderly care, according to new proposals for solving Britain''s ageing crisis.

Research by Professor Les Mayhew and colleagues, published in the November 2010 Economic Journal, sets out a range of financial products that could be created by the private sector to help people pay for long-term care in old age.

With the population in Britain over age 65 expected to soar to 14.2 million by 2024, and many people unable to pay independently for long-term care, new sources of funding are urgently needed.

The researchers argue that new financial products would make long-term adult care more affordable for people on all incomes, and reduce the number of elderly people forced to sell their homes.

Among the products they propose are a form of equity release for the value in people''s homes, ''top up insurance'' to bridge the gap between income and care costs, and disability linked annuities (DLAs).

DLAs operate like a pension but provide enhanced payments when a person becomes disabled and needs care. DLAs could operate within public as well as private pension schemes, and so everyone with a pension would have the chance to participate.

Although these products may not cover all possible risks and therefore all needs, they would bring much needed new money into the long-term care system and lift some of the future burden from the taxpayer as the population ages.

With large numbers of people living on very low incomes, and with limited housing wealth to pay for care, not everybody would be able to afford or make use of these products. To meet this need, the concept of ''Long Term Care'' (LTC) bonds is proposed, which would be attractive to many including those on low incomes and could be purchased over the counter.

LTC bonds would work like premium bonds and pay prizes each month, but would only be cashable at the point of need. Unspent bonds would pass to a person''s estate and could potentially pay for funeral costs. Other options set out in the study include accelerated life insurance and immediate needs annuities.

Professor Mayhew says:

''Taken together, these products offer a range of choices that would suit people of different personal circumstances and attitudes to financial planning.

''In all cases, there are already comparable products on the market, meaning variants could be readily set up.''

The research also calls for a reform of the current means-testing system, which critics say penalises those who have worked hard and saved, and rewards those who have not.

A simplified and fairer system of public entitlement based on income and wealth is proposed that would replace current means-testing, with the gap between entitlement to support and the actual cost of care being met by the individual. There would be a unified assessment system with financial advice available at the point of need.

''The Role of Private Finance in Paying for Long Term Care'' by Les Mayhew, Martin Karlsson and Ben Rickayzen is published in the November 2010 issue of the Economic Journal.