- yearly increases in benefit at a fixed rate between 2 per cent and 10 per cent each year (often, whole numbers must be chosen);
- yearly increases in line with the retail price index;
- yearly increases of 2-3 per cent more than the rise in the retail price index.
A client can often choose in which month the annual increase takes place, to fit in with their arrangement with their care provider.
The higher the percentage increase, the larger the single premium required to purchase the immediate care plan.
Protecting the cost of purchasing the immediate care plan
One of the biggest disadvantages of immediate care plans is that, once they are in place, there is no refund of the premium. However, there are two types of protection that can be used to offset this to some extent.
One is short-term premium protection.
In this, if the client were to die within six months of the start of the plan, their estate would receive a percentage of the original premium, less any monthly payments already made.
This is often on a decreasing scale. For example, the refund in month one would be 100 per cent, falling to 25 per cent in month six. Some providers include this automatically at no extra cost.
The second type of protection is long-term premium protection.
For an extra payment, clients can put in a “capital protection” clause. This allows their family to get some of the lump sum payment back if they die early, and is normally part of an additional protection plan.
Clients can typically choose to cover 25 per cent, 50 per cent or 75 per cent of the total premium paid for the immediate care plan.
The amount returned when the client dies will be the amount covered, minus the amount already paid out as an income.
If the monthly benefit payments made exceed the protected percentage chosen, the estate will not receive any payment on the client’s death.
Taxation of benefits
Immediate care plans are a type of purchased life annuity and are classed as an immediate-needs annuity.
A purchased life annuity has a tax-free capital element and a taxable interest element.
The income from an immediate-needs annuity is tax-free if paid to a registered care provider. However, it is taxed as a purchased life annuity if paid to the care recipient directly.
The main requirements for qualification as an immediate-needs annuity are that the person upon whose life the annuity depends is unable to live independently at the time the annuity is taken, and the benefits are paid directly to a registered care provider or a local authority by an insurance company to pay for their care.
This contrasts with the situation where a purchased life annuity is set up and sometime later the annuitant moves into long-term care. Then the annuity payments would continue to that person and the interest element would continue to be taxed.
