Escalation & Premium Protection
Annuity Options - Escalation and Premium Protection
No one person’s health or needs are the same and so to accommodate this, insurers offer a range of options including escalation and both short and longer-term capital protection.
Escalation of benefit
Immediate need annuities can either offer a static /level income, or if you pay a little more, can provide an escalating income to help offset increasing care fees.
This escalation can either be a set rate e.g. 5% p.a. or can be linked to inflation with benefits increasing by Retail Prices Index (RPI) or possibly RPI +2% p.a.
What is even more helpful is this escalation can be arranged so that benefits increase in the same month as your care provider increases their fees, irrespective of when the plan is initially set up.
So even if you only set up a plan in December but fees increase every April the income can be set up so it increases in April just 4 months after being set up. It will then increase every April thereafter, helping to make meeting fees even easier.
Whilst it might seem obvious in the face of escalating care fees that you should always opt for an escalating annuity, it will cost more and therefore leave you with less money. Any escalation, therefore, needs to be worth it.
If remaining funds, after purchasing a level annuity, would be considerable and could adequately meet future recurring shortfalls, if you feel care may only be required for a relatively short period you may just prefer to opt for a level annuity.
On the other hand if securing care is more important and any annuity would consume a considerable amount of any savings, if you can afford it, you may prefer to pay more now for escalation.
Premium Protection or Capital Protection – One of the risks of buying an annuity is you can never be sure just how long care will be required and if this turns out to be much shorter than expected, with a normal basic annuity there would be no refund of any unused premium.
This risk can be reduced simply by paying a little more and buying premium protection, also called capital protection, which will ensure at least 25%. 50% or 75% of the premium will be paid – either in the form of income paid to any care provider, or should you die before the annuity provider has paid this amount, your estate will receive any remaining balance.
E.g. If the premium to provide a level £40,000 p.a. income together with 50% longer-term capital protection is £200,000, the guaranteed amount will be £100,000 (50% of £200,000). Should death occur after just 12 months and, therefore, only £40,000 income has been paid, the remaining balance of any guarantee – in this case £60,000 would be refunded to the estate. The other 50% is lost. However, if death occurred after 2 years and therefore £80,000 has been paid towards care, you would only receive a refund of £20,000 (£100,000-£80,000 paid in fees) It, therefore only offers decreasing protection with any refund decreasing as time goes on and after a certain period, in this example2.5 years, no refund would be due.
How much extra will Escalation or Capital Protection Cost?
This will depend on what rate of escalation or how much capital protection you need or want and will also depend on individual insurers underwriting. The only way of finding out is to ask us to obtain accurate quotes for you, which we will do free of charge.
Which options will be right?
Whether escalation or capital protection may be best will depend on; how long you feel care may be required together with whether there is sufficient money to meet recurring shortfalls if you chose just a level annuity.
You will be better able to judge once we obtain all possible quotes for you.
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