Pre-funded long-term care insurance

You can buy this in advance, in case you need care in the future. You can buy it at any age, but some have a minimum age for receiving the plan benefits of 40 or 50.

How does it work?

You take out an insurance policy that will pay out a regular sum if you need care. It pays out if you are no longer able to perform a number of activities of daily living (such as washing, dressing or feeding yourself) without help, or if you become mentally incapacitated. The money it pays out is tax-free.

Some existing policies may be linked to an investment bond, which is intended to fund the premiums for the insurance policy. These policies involve more investment risk and, in some cases, can use up your capital.

What does it cost?

You pay either regular monthly premiums or a single lump sum premium. In either case, the insurance company usually reviews the plan, say every five years, and the premiums may then rise – even if you've bought a single premium policy. Premiums depend on your age, sex and the amount of cover you choose.

Is it right for you?

• You might never need care, and so you don't claim, in which case you may not get any money back. However, with an investment-linked policy, you get the balance of the investment fund if you cash in the policy. But how much you get will depend on how well the investment element has performed and how much the insurance premiums that it is intended to fund have increased – in some cases there could be nothing left.
• Any money you get from the policy may affect the amount you can claim in means-tested State benefits.
• If you have valuable savings or assets (such as a home) that you don't want to lose, LTCI may be worth considering.
• LTCI may also help you choose better quality care than your local authority would help pay for.

Questions to consider with your adviser

• How much cover do you need?
  Most LTCI policies typically cover only part of the cost of care, with the remainder coming from your income and State benefits.
• How much could you pay out of your income towards long-term care, including State benefits, and how much extra would you have to find to meet likely care fees?
• How much would LTCI cost to meet the shortfall, either as immediate care LTCI or as pre-funded LTCI?
• What's not covered?
  Temporary problems, such as care after an operation won't be covered. Nor will health problems caused by alcohol or drug abuse, or due to attempted suicide, or if it relates to HIV or AIDS. Some mental conditions such as depression and schizophrenia are also usually excluded.
• What happens when you die?
  This will depend on the type of policy, the options selected and whether you are taking benefits from the plan at that time. Some insurance policies will pay out a lump sum to your estate if you die within the first few years of taking out the policy without actually claiming on it. However, most pay nothing.
  Investment-based contracts should return the balance of the investment (but this will depend on investment performance and whether insurance premiums have reduced the value). After benefits have begun to be paid, the income usually stops. Some plans may provide a minimum return or a capital lump sum. Investment-based contracts may return any unused capital.
• Is inflation taken into account?
  Most plans let you choose whether or not the money you get from the policy is fixed, or increases either by a set amount each year or in line with inflation.
• Are there other more suitable ways to meet the cost of care?

Top tips

1. Check what's not covered and ensure you disclose any existing medical condition.
2. Ask questions if anything is not clear.