Is income-indemnity insurance an aged care solution?

Researchers propose a new flexible model for retirement needs

Routine actions such as eating and showering are generally taken for granted until, often with age, they become difficult to perform without some assistance.

In an ageing population, the issue of caring for those who are no longer able to carry out the so-called basic activities of daily living – eating, bathing, dressing, toileting, transferring (walking) and continence – has wide ranging financial and other implications.

The monetary costs are substantial, irrespective of whether care is carried out informally by family and friends or within the formal mechanisms of government-subsidised home care programs or residential facilities.

Possible solutions, including voluntary personal insurance and compulsory insurance similar to the National Disability Insurance Scheme, have been largely rejected on a variety of grounds, including the high number of people expected to need aged-related care and the inflexibility of any payouts.

While financial products that assist individuals to meet the costs of their aged care needs exist in Australia, none have really hit the mark.

Now researchers from the ARC Centre of Excellence in Population Ageing Research (CEPAR) at UNSW Business School have proposed a solution in an insurance product that pays regular income benefits to those who need some level of aged care regardless of where it comes from.

With the majority of the older population being cared for by family and friends, an aged care income-indemnity insurance product which makes payments irrespective of whether formal care services are used or not could be particularly appealing, says CEPAR research fellow Shang Wu.

In the recent study, Income-indemnity long-term care insurance: Selection, informal care and precautionary savings, Wu and colleagues looked at the demand for an aged care income insurance product versus other ways of covering the cost of care, including a Long Term Care Insurance product offered in the US which reimburses expenses for care costs. 

'An annual income paid for life, or stopped if someone recovered sufficiently that they no longer needed care, was attractive to survey respondents'

SHANG WU

Existing options

Presently in Australia, Challenger Limited offers a solution of sorts in its CarePlus product. It provides a guaranteed regular income for the life of the investor to help cover the costs of aged care and living expenses. Conveniently, it works well with Centrelink's means-tested aged care pension and aged care costs.

When the investor dies, 100% of the amount invested is paid to nominated beneficiaries or the investor's estate.

According to Challenger, sales of CarePlus doubled to $90 million in the six months to December 31, 2016, compared with the previous corresponding period, indicating growth in demand for the product.

The issue with CarePlus is that because it can only be purchased after someone starts needing care – that is, they are deemed eligible for government-subsidised care – it is not insurance for aged care. Rather, it is a way of structuring one's assets to pay for the care.

A more recent product aimed at people aged 50-69 is Future Well Independence insurance to cover the care needs of those impacted by a chronic condition or an accident. Depending on their situation and the chosen level of care, an insured person can receive a lump sum up to $200,000 to spend on any care needs.

As opposed to CarePlus, the aged care income product proposed and surveyed by the CEPAR researchers could only be purchased by an individual not in need of any care and therefore would require a lower premium to be paid.

For the sake of the study, the proposed aged care income insurance required a one-off premium paid at the time of purchase, in exchange for income benefits when the purchaser was functionally disabled in the activities of daily living or was diagnosed with dementia.

A set amount would be paid to the insured each year irrespective of whether he or she needed to pay for the care. There would also be complete flexibility around how the money could be spent, including to family members.

Demographic trends

It is estimated that 80% of people receiving care and support in the community receive it from family members and other informal carers, such as friends and neighbours.

However, care and support by family members is not costless, even if no one gets directly paid. In addition to regularly using their own money in their caring role, carers often have to give up paid employment.

Demographic trends indicate a further problem in that there will be a decline in the relative availability of informal carers, coinciding with an increased demand for aged care services.

A range of options for broadening the funding base to meet the costs of caring for older Australians have been explored, including by the Productivity Commission.

The Institute of Health and Welfare predicts that 80% of Australians over the age of 65 will require home or residential care. The cost of aged care to the federal government is predicted to double to about $26 billion in the next 10 years, with the majority going to residential aged care.

Additional costs of at least $7 billion a year are incurred by the government through the provision of a Carer Allowance. In 2014 it was paid to about 220,000 Australians aged above 65 who were registered as caring for others.

The contribution individuals have to make towards any government-subsidised care, whether they receive it in their own home or in a facility, depends on a number of factors including their income and asset levels.

Generally it is a user-pays system, with a portion of an individual's care costs to be met either by government pensions, an individual's retirement or other savings, or family and friends.

Where they have the means, an individual looking to residential aged care may be required to pay a Refundable Accommodation Deposit, or its equivalent as a Daily Accommodation Payment, in addition to a basic daily and means-tested care fee.

Home care packages which provide access to care services in the home are also means-tested.

'The aim and attraction of the aged care income insurance would be to provide compensation to those who are cared for by family or friends'

SHANG WU

 Comfortable retirement

Wu points out that if people are receiving informal care from a spouse or children, then it is hard to get reimbursed for care-related expenses, so as a product, long-term care insurance is not popular.

He says the aim and attraction of the aged care income insurance proposed by CEPAR would be to provide compensation to those who are cared for by family or friends – which is the case for the majority of older Australians for both cost and personal reasons.

But it is not just about paying family and staying at home.

According to Wu, older people who need to go into residential aged care and pay the sometimes high Daily Accommodation Payment, in addition to the care costs, would also be more likely to be interested in an aged care income product.

"The flexibility the [proposed] product offered and the fact it could be an annual income paid for life or stopped if someone recovered sufficiently that they no longer needed care, was attractive to survey respondents," he says.

For Wu, an aged care income insurance could be a suitable complement to government-subsidised care, helping retirees to secure a comfortable retirement with peace of mind. 

The CEPAR team for the study was research fellow Shang Wu, senior research fellow Ralph Stevens, UNSW Business School professor and head of the school of risk and actuarial Hazel Bateman, and University of Sydney Business School finance professor Susan Thorp.