Using insurance to pay for care fees tax efficiently

Apr 18, 2018 | Tony Byrne's View

One of the big challenges facing elderly people these days is how to pay exorbitant care fees when you have savings but not enough to pay such fees.

Well the good news is that it is possible to buy long term care insurance which works in the same way as an annuity. It is designed to pay a high guaranteed tax free regular payment to a care fee provider usually when you are about to start paying care fees. It is known as an Immediate Care Needs Annuity. You pay a lump sum to buy the income which pays your care fees.

The insurance is underwritten which means that the terms you are offered are based on your state of health and your age. Other factors that determine the price are the level of income you need and current annuity rates.

You can even build in capital protection in exchange for an extra premium which returns some of the lump sum to you if you do not survive very long after taking out the insurance. Inflation proofing can be added as an extra too if you are worried about care fees escalating in the future.

Immediate care needs annuities are not suitable for you under the following circumstances;

You do not need to pay care fees immediately
Care may only be needed temporarily
You may want your money back in the future
You might be entitled to NHS Continuous Care funding which is free and not means tested

One additional benefit of such annuities is that the lump sum payment immediately reduces your estate for Inheritance Tax purposes so for every £100K invested £40K Inheritance Tax is saved.

The downside of these annuities is that you do not know how long you are going to live. If you only live a short while after buying an annuity you will have wasted much of the premium. On the other hand if you live much longer than was expected you will benefit substantially. However, as the insurance is underwritten by an insurance company which has to make a profit the odds are heavily stacked against you in much the same way as bookmakers, casinos and betting companies have the upper hand. You may be one of the lucky ones but you are highly likely to be in the minority.

Nonetheless as some annuity rates can be as high as 15%-20% or more and the benefit is tax free, Immediate Care Needs Annuities may still be worth considering as part of an overall strategy to fund care fees by taking a calculated risk and minimising the destruction of your estate leaving of much of it as possible to be inherited by your family.

Immediate care needs annuities are only one way of paying for care fees. There are other ways to fund the cost but given the right circumstances they may be the right solution for you or an elderly relative of yours.

As usual it pays to get professional advice ideally from an independent financial adviser especially one who is a member of SOLLA, the Society of Later Life Advisers, which is the premier organisation for members advising elderly, vulnerable individuals. So if you or an elderly relative of yours needs such advice do get in touch with us. You know it makes sense.

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