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Long Term Care and Investment Bonds

Most people are entitled to non-means tested nursing care in England, Wales and Northern Ireland. Personal care, however, is means tested and depending on which part of the UK you live you may be required to contribute to part or all of the cost of residential care.

The good news for investment bond investors is that the surrender value of life insurance is disregarded indefinitely when means testing. This means that the surrender values of investment bonds with a life assurance element are usually disregarded by local authorities. This is not the case if the investment bonds are set up on a capital redemption basis; these do not contain a life insurance element and would be part of the means testing process under the 2012 rules. This rule can change and the latest details can be found on the Charging for Residential Accommodation Guide (CRAG).

Any income drawn from investment bonds is generally included in the means test calculation.

However, those wishing to avoid losing their capital to nursing home costs at the last minute need to be aware of the Deliberate Deprivation Rules. This rule relates to a person claiming assistance with care costs who has given away assets or converted them into investment bonds, with the intention of avoiding paying care costs. In this case the gifted or converted capital will be treated as owned by the claimant and means tested.

Below are some examples of Deliberate Deprivation rules as taken direct from the CRAG:

Examples of where a person has deprived themselves of capital (although not necessarily for the purposes of avoiding a charge for accommodation)

  • A lump-sum payment has been made to someone else (e.g. as a gift or to repay a debt)
  • Substantial expenditure has been incurred (e.g. on an expensive holiday)
  • The title deeds of a property have been transferred to someone else
  • Money has been put into a trust which cannot be revoked
  • Money has been converted into another form which would fall to be disregarded (e.g. personal possessions)
  • Capital has been reduced by living extravagantly (e.g. gambling or following a much higher standard of living than the resident could normally afford)
  • Capital has been used to purchase an investment bond with life insurance. Local authorities will wish to give consideration, in respect of each case, to whether deprivation of assets has occurred i.e. did the individual place his capital in such an investment bond so that it would be disregarded for the purpose of the Assessment of Resources Regulations.
  How suitable are Investment Bonds for long term care?

There are no assurance companies at this time that provide an actual long term care bond that would pay out an insurance in the event of a client needing long term care. Although there is little evidence; we expect this is due to increasing costs of care and the length of time people are now spending in care due to medical advances and life longevity.

Investment bonds are set up to shield the investor from tax; however that becomes limited if the income needed from the bond is to exceed 5%, as this would trigger a chargeable event giving rise to a potential income tax liability.

With the cost of care rising each year by about 6%, any investment used to pay for care provision must be able to accommodate an increasing cash flow and the bond may not be able to fulfil this requirement.

The size of the lump sum to invest relative to the cost of the care becomes an essential factor when considering the long term benefits of using an investment bond for care provision, as regular return of capital may be a necessity.

One benefit is, should the owner of the investment die in care, the estate would benefit from any remaining capital in the investment bond, which would then be surrendered. This would not be the case with a long term care annuity, where the potential capital value would not be returned.

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