Private healthcare

While the National Health Service (NHS) provides comprehensive and generally good-quality healthcare, particularly for acute conditions, many families like the choice, flexibility and speed associated with private healthcare. While it is perfectly possible to pay for private healthcare as it is needed, whether or not this is viable will very much depend on the level of your financial resources, your expected quality of health throughout your lifetime and the treatment required.

Figure 13.1 Combined high-value general insurance policy

For most people it will be preferable to put in place some form of PMI to protect against large medical costs and, as a result, protect the family wealth. The problem with PMI is that it becomes quite expensive as you get older, given the higher risk of claims arising. There are several ways that you can minimise the cost of PMI, including having a high excess, accepting a restricted choice of hospitals, restricting certain medical conditions, and the last and probably most popular option being able to restrict private healthcare provision to instances in which care could not be provided by the NHS within a specified time period, typically six weeks.

Certain long-term health conditions are not treated by the NHS where the primary need is not nursing care. If you live in England or Wales you will be required to pay for any long-term care, whether this is in your own home or a residential care home. Long-term care is most likely to be required in older age and certain health conditions, which are not necessarily life-threatening, can last for many years, causing a serious drain on the family wealth. Long-term care is covered in more detail in Chapter 19.

Care fees

Long-term care insurance (LTCI) is similar to PMI in that it pays some or all of the costs of care but only if the insured is unable to perform a number of ‘activities of daily living’ (ADLs) or is permanently cognitively impaired (senile). ADLs include washing, moving, dressing, feeding, using the toilet and getting in and out of bed, and it is usual for the policy to require the policyholder to fail at least two, but more often three, of these before a claim will be paid. LTCI will continue to pay a claim until either recovery or death.

There are relatively few providers active in the LTC market, compared with other types of insurance, but those that are have a lot of experience and useful products. The only current LTCI policy available in the UK market is a care fees annuity – this is designed for those who need care immediately or on a deferred basis and wish to pay a single lump sum to pass the long-term liability for funding care costs to an insurance company. As with all annuities, those who live beyond the average will be better off and those who don’t will be worse off. An immediate or deferred care annuity can be useful if it is essential to have certainty about being able to afford the cost of care but financial resources are limited. However, this still doesn’t mean that all future care costs will be covered, particularly if care costs rise faster than the escalation factor (if any) added to the policy.

Critical illness

Critical illness (CI) insurance, originally known as ‘dread disease’ insurance, pays a lump sum on the diagnosis of any one of a range of serious illnesses or possibly in the event of suffering a permanent and total disability (PTD). However, it’s important to note that some types of cancer are not covered and to make a claim for some illnesses, such as a stroke, you need to have permanent symptoms. For other conditions, such as a heart attack, the illness must be of a specified severity. Examples of conditions on which a valid claim would be paid are shown below:

Alzheimer’s disease before age 65 – resulting in permanent symptoms.

Aorta graft surgery – for disease and trauma.

Aplastic anaemia – resulting in permanent symptoms.

Bacterial meningitis – resulting in permanent symptoms.

Benign brain tumour – resulting in permanent symptoms.

Benign spinal cord tumour.

Blindness – permanent and irreversible.

Cancer – excluding less advanced cases.

Carcinoma in situ of the breast – requiring mastectomy or lumpectomy.

Carcinoma in situ of the testicle – requiring surgery to remove one or both testicles.

Carcinoma in situ – urinary bladder.

Cardiomyopathy.

Cerebral aneurysm – treated by craniotomy or endovascular repair.

Coma – resulting in permanent symptoms.

Coronary artery bypass grafts – with surgery to divide the breastbone (a payment is available to pay for surgery after being placed on an NHS waiting list).

Creutzfeldt-Jakob Disease (CJD) – requiring continuous assistance.

Deafness – permanent and irreversible.

Encephalitis.

Heart attack – of specified severity.

Heart-valve replacement or repair – with surgery to divide the breastbone.

HIV caught from a blood transfusion, by physical assault or at work.

Kidney failure – requiring dialysis.

Liver failure – end stage.

Loss of independent existence – resulting in permanent symptoms.

Loss of hands or feet – permanent physical severance.

Loss of speech – permanent and irreversible.

Major organ transplant.

Motor neurone disease – resulting in permanent symptoms.

Multiple sclerosis – with persisting symptoms.

Multiple system atrophy – resulting in progressive and permanent symptoms.

Non-malignant pituitary adenoma with specified treatment.

Open heart surgery – with surgery to divide the breast bone.

Paralysis of limbs – total and irreversible.

Parkinson’s disease before age 65 – resulting in permanent symptoms.

Pneumonectomy – for disease or trauma.

Pre-senile dementia before age 65 – resulting in permanent symptoms.

Primary pulmonary arterial hypertension – resulting in permanent symptoms.

Progressive supranuclear palsy.

Prostate cancer low-grade.

Pulmonary artery surgery – with surgery to divide the breastbone.

Removal of an eyeball as a result of injury or disease – permanent physical severance.

Severe lung disease/respiratory failure – of specified severity.

Stroke – resulting in permanent symptoms.

Systemic lupus erythematosus – of specified severity.

Terminal illness.

Third-degree burns – covering 20% of the body’s surface area or 50% of the face’s surface area.

Total permanent disability – unable before age 65 to look after yourself ever again.

Traumatic head injury – resulting in permanent symptoms.

This list of conditions, provided by Zurich Assurance Ltd (one of the largest critical illness insurers in the UK), is not a standard offering across all policies and providers – the list will vary in number and interpretation of each illness depending on the provider.

Sometimes CI and/or PTD benefit can be provided in addition to or in advance of normal life insurance via a single protection policy. Alternatively, CI/PTD can be provided as standalone cover. The cost of CI/PTD cover has risen quite sharply over the past ten years, and it becomes particularly expensive for those over the age of 45 and/or smokers, due to the increased risk of a claim arising. Whether or not you need CI/PTD cover depends on a number of factors, including the quality-of-life implications that would arise in the event of you suffering a serious illness or permanent disability. CI/PTD cover is a ‘nice to have’ once you’ve sorted out other insurance cover. Table 13.1 gives an example of the kinds of costs you could expect for £100,000 of cover.

Table 13.2 Illustrative cost of £10,000 pa PHI cover – annual premiums

Source: IRESS Exchange Comparison Services, May 2014 non-smoker, to age 60, class 1 occupation, own occupation work definition, non-smoker.

Family income benefit

Family income benefit (FIB) is a special type of life policy that provides regular payments (free of income tax) in the event of the policyholder’s death until the end of the policy term. In effect it is like life insurance in instalments. An FIB policy is likely to be cheaper than a term insurance or whole-of-life policy with the same term and total benefit level. This is because the insurer’s risk gradually reduces as the policy progresses. For example, with a 20-year level-term policy of £500,000, if the insured died after 19 years and 330 days, the insurer would still have to pay out £500,000. With an FIB policy with £25,000 of annual benefit (a potential total payout of £500,000), if the insured died after 19 years and 330 days, the insurer would pay out only about £2,000, being 1/240th of the total initial benefit. Another benefit of FIB cover is that it avoids the need to have to invest funds to generate an income and therefore keeps things simple at what may be a very difficult time. Some policies allow future benefits to be paid as a discounted lump sum if necessary. Figure 13.2 gives an idea of how an FIB policy works while Table 13.3 illustrates the annual costs of FIB cover.

Figure 13.2 How a family income benefit policy works

FIB offers very good value protection for those people still earning income and who want to replace it in the event of their death and where they do not want, or have insufficient resources, to self-insure. However, even if you are financially independent FIB might still be useful as part of an overall estate plan, particularly if you have agreed to fund the education of family or friends or have other regular financial commitments, such as child maintenance payments, that you would like to continue in the event of your death. In this scenario an FIB policy provides a simple and targeted solution. Please note that to avoid inheritance tax it is usually advisable to assign life policies into a flexible trust. In Chapter 21 I explain the main types of trusts and their application.

Table 13.3 Illustrative cost of FIB cover – annual premiums

Source: IRESS Exchange Comparison Services, May 2014 non-smoker, class 1 occupation, non-smoker.

Term policy

Another type of life assurance policy is a term protection policy. This type of policy has a set term of between 1 month and as long as 40 years, during which a lump sum (whether that is level, decreasing or increasing) would be paid out upon your death providing that the premiums are paid on time. The policy never accrues a value unless a claim is paid and premiums can be guaranteed to remain the same throughout the term. Alternatively, for a lower initial level of premium, future premiums can be subject to adjustment if the insurance company’s rates change. Table 13.4 illustrates the cost of term insurance.

Whole life

A whole-of-life policy is designed to provide life cover, usually, until age 99. Premiums can be guaranteed or reviewable. If reviewable, premiums can be set at a lower initial level (usually the first ten years, then at five-yearly intervals), but expect steep increases in the future. The key benefit of this type of policy is that the cover continues as long as you pay the premiums.

Relevant life policy

A relevant life policy (RLP) is essentially a life policy that is taken out by a company, limited liability partnership (LLP) or sole trader for the benefit of an employee. Subject to certain conditions, the premiums will be deductible against corporation tax (or profits in the case of a sole trader or members of a partnership) and not assessed as a benefit in kind for income tax and national insurance purposes against the employee. Partners, LLP members and sole traders are not employees for the purposes of an RLP. If, however, you run your business via a limited company and are also a director, then you are treated as an employee, whether or not you take substantial remuneration. This opens up the possibility of arranging your life insurance through your business and, as a result, lowering the cost substantially compared with a personal policy.

The company, as your ‘employer’, would apply for the RLP and as part of the application process would also complete special RLP trust documentation. The company would therefore be a trustee of the RLP, but it is perfectly acceptable to appoint additional individual trustees such as your spouse. The RLP benefit would be payable if you die before you reach age 75. Other benefits available are in respect of ill health, disablement or death by accident, but these benefits are payable only as long as you are still in employment. In the event of your death, the life policy benefit will be paid by the insurer to the trustees of the RLP. The trustees would have discretion as to who should receive the benefit from the classes of beneficiaries specified in the trust. If you have previously completed a nomination form addressed to the trustees of the RLP trust, this will give a non-binding expression of your wishes to them as to who you would prefer to gain from the death benefits. This is similar to the method of nominating beneficiaries under a registered pension scheme.

Any benefit payable for ill health or disability will be paid in the same way as the death benefit, i.e. to the trustees of the trust. As the employee is one of the trust beneficiaries, the trustees can make the payment either to the employee or to their family. The trustees will need to consider all the circumstances at the relevant time in order to decide who should receive the benefit. There is no statutory maximum amount that may be provided by an RLP. Insurers may have their own commercial maxima and associated underwriting/financial underwriting limits and the sum assured should be reasonable in relation to securing deductibility for premiums paid by the employer under the ‘wholly and exclusively ‘ rules on the provision of benefits under the plan.

There are no other tax implications as long as the life assured is alive. Once the death benefit is paid to the trustees, as the trustees will hold the benefit subject to a discretionary trust, then the normal IHT rules that apply to the taxation of discretionary trusts (the ‘relevant property regime’) will also apply here. This will mean potential periodic and exit tax charges (see Chapter 21).

If the life assured leaves service and takes up a new employment, it may be that the new employer will be prepared to take over payment of the premiums and so keep the cover in force. Otherwise the policy would come to an end.

Loan protection

If you have any personal or business borrowing, check the position in the event of your death. Some loans have a clause that requires the loan to be repaid if the principal borrower or director dies. It is usually a better use of the family’s or business’s money to pay insurance premiums than to be scrambling around for cash to pay the bank at such times. Also check that you are getting good value for money as insurance offered by banks and other lenders is rarely the best value, particularly for large policies. The cost of life insurance has fallen a lot in the past ten years as life expectancy has increased. A term protection-only policy is usually the right type of policy in this situation.

Business protection

If you are a partner or one of several shareholders in an unquoted business, you need to ensure that your business or co-business owners have the means to fund any buyout of your share in the event of your death. There are two components to this planning: the agreement to buy and sell and the insurance or financial means to fund the transaction. A double-option agreement (which allows either party to enforce it) is usual in the case of individuals, giving both sides the option to buy/sell and a life assurance policy to fund some or all of the buyout, without impairing the retention of business or agricultural property relief against IHT on the business assets – see Figure 13.3.

Figure 13.3 Business protection and double option agreement

The life policy can either be owned by the other business owners or by you and written in a special business trust for their benefit. You need to make sure that you have similar agreements and policies for your other co-owners. Where the company is to be the buyer of your shares in the event of your death, the life policy will be taken out by the company and the company’s articles of association need to be checked to ensure that the company is permitted to buy its own shares. Term protection or whole-of-life is suitable to provide this cover, but they have different tax treatments on premiums and benefits. This is a complex area and specialist advice is required to ensure that things are structured correctly and the most beneficial tax treatment is secured.

Table 13.6 Illustrative cost of £1 million long-term life cover – annual premiums

Source: IRESS Exchange Comparison Services, May 2014 non-smoker.

Table 13.7 Illustrative cost of £100,000 gift inter-vivos life cover

Source: IRESS Exchange Comparison Services, May 2014 non-smoker.