Last week's column looked at products designed to provide either a lump sum or income to the insured in the event of the diagnosis of a critical illness or an inability to work as a result of accident, illness or redundancy. This week's column continues with the theme of protection products covered in the CeMAP syllabus and considers private medical insurance and long-term care.
PMI is a protection plan that is designed to provide cover for the cost of private medical treatment, thus eliminating the need for total dependence on the NHS. PMI works in conjunction with what the NHS can offer. First, an individual must obtain a referral from their GP, who will establish the nature of the ailment and determine whether specialist treatment is required. A person will need to have been seen by a GP for a valid PMI claim to be submitted. Plans can be arranged on an individual basis or as part of a group scheme established by an employer. Employer-sponsored schemes account for the majority of PMI provision in the UK.
PMI can offer a number of benefits – for example, avoiding NHS waiting lists, a choice of hospital for treatment and a choice regarding the timing of treatment. Cover would normally include costs such as nursing fees, accommodation and operating fees. Some policies offer additional benefits such as the payment of a daily sum of money if treatment is in an NHS hospital and involves an overnight stay. The way in which benefits are paid varies: some providers will offer a full refund of charges with payment made direct to the healthcare provider, while others impose an upper limit on the amount that can be reclaimed in any one year.
A number of factors affect premiums, such as the age and medical history of the person applying for cover and the type of hospital that the insured is allowed to access, with London teaching hospitals being among the most expensive. Cover is generally not provided for pre-existing medical conditions and other exclusions can include, for example, routine optical, dental and maternity care. Premiums are subject to insurance premium tax at a current rate of 5%. The benefits are paid out tax-free.
The purpose of a long-term care plan is to provide funds to meet the cost of care. These costs are likely to rise in later life when an individual is no longer able to competently perform some of the basic activities involved in looking after themselves, resulting in help being required. The amount of benefit paid under a LTC plan will depend on the degree of care required by the insured. This will be established by ascertaining the person's ability to carry out a number of 'activities of daily living'. Typical activities would include washing, dressing, feeding, going to the toilet and moving from room to room.
However, each LTC insurer has their own definition of what constitutes an inability to carry out an ADL, although many follow the definitions laid out by the Association of British Insurers. The greater the number of ADLs that cannot be performed without assistance, the greater the amount of care required and, therefore, the higher the level of benefit that will be paid. It is normal for insurers to require that an individual must be incapable of performing at least two or three ADLs before a claim can be accepted.
It is not necessary for a person to require nursing care or to be confined to a nursing home to receive benefits. For example, a person may not be able to dress or undress themselves or prepare food unaided. Therefore, the range of support they would need may be limited to a person coming in at certain times during the day to help with those activities. If the insured requires residential nursing care, a higher level of benefit can be paid to reflect the higher costs of this type of care.
Insurers can make LTC available in a number of ways, such as an investment-backed contract or on a pure protection basis. In general, benefits are either paid direct to the insured or to the organisation providing the care. In either case, the benefits are free of tax. Where the plan is investment-backed and involves the purchase of an annuity to fund long-term care, income tax at a rate of 20% will be deducted from the annuity payment at source. A higher rate taxpayer will have a further liability of 20%.
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