Long-term health insurance strategy is a mess, featuring indistinct legislation, conflicting proposals and regional variations, says Claire Veares.

When the welfare state was first introduced, its aim was to provide for people from the cradle to the grave. But, as an increasing number of elderly people have discovered, while the money may be around at the cradle stage, it can run out well before the grave.

Having grown up with the idea that the state would look after them all their lives, people are now being faced with care bills which can reach £20,000 a year. Suddenly the house, which was due to be passed on to the children, has to be sold to pay for residential care.

Taking out insurance to cover the cost of care is an obvious solution but, in recent years, the issue of long-term care funding has been one of much debate and little certainty. Those with moderate savings could rest assured that the state would provide. Those with more substantial assets remained unsure whether insurance was the best way forward.

A Royal Commission on long-term care, headed by Sir Stewart Sutherland delivered its report in March 1999. It recommended that the state should pay for both nursing and personal care. Accommodation and food would be subject to a means test. However, the government (in England and Wales) baulked at the cost - around £1bn a year - and has said it will only pay for nursing care.

What does it all mean?
Unfortunately, there is no clear division between nursing care and personal care that anyone can put their finger on. "It's still not been decided what nursing care is," says Mervyn Kohler, head of public affairs at Help The Aged. "So how do you work out how much of it someone is getting?"

The nursing element of care fees costs around £5,000 a year, leaving a shortfall of £15,000. For those looking to make this up with insurance, there are three options. Immediate care plans limit the amount that someone who needs help straight away will have to pay in total. The other two schemes are prefunded, with the money invested in either bonds or securities. The market, though, has been greatly influenced by the ongoing debate. "At the moment, most of the people who want this kind of service are those in immediate need. The market for future provision seems to be as flat as a pancake," says Kohler.

According to Brian Bartley, Bupa Health Assurance's head of operations, there are around 35,000 active prefunded policies. Most were taken out in 1995 and 1996, prior to the government's announcement that a Royal Commission would be looking into the area. "People are hanging on in the hope that the government will change its mind," Bartley says.

Cover can begin at any age
Policies are triggered by what are termed "activities of daily living". Six have been identified by the insurers. Bupa defines them as washing, feeding, dressing, moving (for example from room to room), transferring (for example in and out of bed) and continence. Failing to be able to carry out one of these will bring an immediate needs policy into play. With prefunded policies people need to "fail" two or three for cover to be activated.

The average age of people taking out prefunded policies is 67. And two-thirds of those are women, according to Norwich Union head of long-term care strategy Sandy Johnstone, who explains: "As women tend to live longer than men and be younger than their husbands, men are more likely to have someone to look after them in their old age."

The age at which the care can begin under the policies seems to vary. Bartley says most long-term care products have been built around care for the elderly, so they tend to have an entry age of 50. But Paul Bennett, marketing manager for PPP Life Time Care, says there is no reason why someone could not take out a policy at 18 - and benefit from it soon after.

In England and Wales, the government will offer free nursing care from October. Insurers hope this will clarify the situation and lead to increased sales of prefunded policies.

The policies are also due to benefit from cover, access and terms (CAT) standards. These set targets for acceptable protection and value for money. They are likely to be introduced by the end of the year.

Regulation dead ahead
Although regulation of the long-term insurance market is on the cards (not likely this year), talk of clarity in the long-term care insurance market may be premature. As Rabbi Julia Neuberger, chief executive of health care charity The King's Fund, said recently: "The false distinction between nursing and personal care will not go away."

Scotland plans to pay for free care
Buying long-term care insurance is not a high priority for Scottish pensioners at the moment. In January, the Scottish executive, following the recommendations of the Sutherland report, said it would pay for universal personal care as well as nursing care.

Opposition parties have raised doubts about the executive's ability to deliver. The Conservatives described care of the elderly as being "in total confusion", while the SNP said the executive was in "total disarray".

And Lord Lipsey, a member of the Royal Commission, who produced a minority report rejecting Sutherland's recommendations, said free personal care would not result in improvements, but in cuts in home help and care homes.

Lipsey, who favours means testing for free care, has forecast a Scotland colonised by the English middle classes.

Further doubts about the extent of the free care to be offered were raised in April when Malcolm Chisholm, the deputy minister for community care, launched a "pre-legislative" consultation called Better Care to consider a range of proposals to develop long-term care.

The trouble is, some of the proposals appear to conflict with the remit of the pre-existing care development group which is due to report in July.

Among the proposals in Better Care are local authority loans "to enable more people to avoid selling their homes in their lifetime". The need to release equity in this way has been one of the most emotive arguments for the introduction of free care.