Mr Webb, director of policy at Royal London, said he had “already had interest from civil servants”.
The proposal would combine a drawdown account with a care insurance product, with the aim that people’s family home was no longer at risk of being sold to pay for care.
The proposal has been submitted to the Government for them to consider as they prepare the Green Paper on social care due out by the summer.
Money used to buy the care insurance would not be taxed, making it attractive to consumers, and bolting care insurance on to an existing product would make it more attractive for advisers to sell, Mr Webb said.
Mr Webb said: “Focusing on protecting inheritance would make it an attractive product, instead of trying to force people to think about a time when they were too old to look after themselves.”
Mr Webb has written a paper for Royal London called: Is it time for the care pension?
He said: “More than 1 in 4 of us will spend some time in later life in residential care, and the total bill can easily run into tens of thousands of pounds. In extreme cases, people can be forced to sell their family home to pay for care. It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up.
“A ‘care pension’ could build on the increasingly popular ‘income drawdown’ product by adding in care insurance. To make this work, the government would need to make sure payments into such policies were tax-free, and would need to introduce an overall cap on lifetime care costs.
“With these changes, millions of people could start to build up protection against the risk of facing ‘catastrophic’ care costs in later life.”
The policy paper suggested that care insurance could be ‘bolted on’ to income drawdown arrangements, either in the form of a regular premium or a one-off lump sum. To make these products more attractive, the paper proposed:
• Favourable tax treatment on money taken out of income drawdown to pay for care insurance; if this money goes directly to an insurer and any payout from the policy goes straight to a care home, these withdrawals should be tax free;
• An overall cap on people’s lifetime care bills, so that insurers are not taking on an open-ended liability and can therefore offer more attractive premium levels