Published in Mint on 3 June 2015, Written by Kapil Mehta
As a young boy I would accompany my grandfather to visit relatives in a Delhi colony. On one such visit, I saw an old man sleeping on a cot out on the road. The bed was chained to a gate. I later learnt that the man’s family had thrown him out of the house and he had to spend all his time on that bed.
The situation is particularly dire for women. Recently, a group of Air Force wives in Gurgaon sponsored an eye camp where an elderly lady was diagnosed with cataract in both eyes. Her children, despite being relatively well off, have refused to pay for her surgery—which would costRs.12,000. According to the National Sample Survey 2004, over 70% of elderly women are dependent on others.
Every management report underscores that India is relatively young. The average age in India is far less than that in Japan, Europe or the US. But simply because we have a higher proportion of younger people does not mean that we have few old people. According to Census 2011, there are about a 100 million Indians over 60 years. That’s more elderly people than in any of the countries mentioned here. The needs of the old are diverse but my focus is on income and health because these are areas that insurance could address. But, unfortunately, does not.
An essential insurance to guarantee old age income is immediate annuity or pension. In this, a person makes one payment in return for a lifetime of assured income. The lifetime income can be structured in many ways. Sometimes, the guarantee extends only for a few years; often the capital is returned when the person dies. The most important structure, however, is to guarantee an income for as long as the person lives. That is true insurance at work because it caters to the risk of living too long.
In India, if one were to invest Rs.50 lakh into an immediate annuity at the age of 60, it would earn about Rs.40,000 per month. That is a shade over 9% per annum, which is not much more than what a fixed deposit pays senior citizens. To make matters worse, unlike a fixed deposit, no capital is returned to your nominee if you die. The last nail in the coffin (no pun intended) is that annuity income is taxed. That is why we do not see people queuing to buy annuities.
In the US, a comparable annuity pays 5-6% per year, which is about five times the fixed deposit rate. Do these markets have a magic wand that allows them to pay so much more? No. It boils down to pure economics. Insurers aggressively sell annuities because it counterbalances insurance risk. The risk of dying early in insurance is hedged by the risk of living too long in annuities. Developed markets have a transparent and efficient market-mechanism to buy and sell long-term pension risks. Finally, governments and the private sector actively promote long-term bonds with high yields. Consequently, several interesting annuity options have emerged. Unit-linked annuities with guarantees have grown rapidly. A cost-effective product called advanced life deferred annuity has potential. It provides an annuity only if one lives beyond a certain age. So, it can be bought at 60 but will pay a monthly income after you turn 85. Those with poor health can buy impaired annuities that pay them more since life expectancy is less. The point is that there is more product sophistication that insurers can bring.
There are other solutions to increase income—higher retirement age, for one. In both the private and government sector, effective retirement age is lower than 60 years. We need to create jobs and capabilities that can keep people productive for much longer.
Another common problem is that several elderly Indians are asset-rich but cash-poor. Homes are valuable but there is no way to monetize that asset. Some years ago, reverse mortgage loans and related annuities were introduced. The concept is that the elderly mortgage their home and earn a steady annual income. They can live in the house until they die, at which time the house is transferred to the bank. Theoretically, an excellent idea that provides immediate liquidity. Practically, the plans are riddled with operational issues and are a failure. For example, some stop monthly payments after 20 years. Heaven help you if you live longer. Another version included provisions where the pay out could be changed if the home’s value fluctuated. To get the reverse mortgage product right requires real estate, insurance and banks to work together. It is an effort worth making.
On health, the problem is that many diseases suffered by the elderly are not covered by insurance. Also, the limited insurance available is very expensive. According to the Situational Analyses of the Elderly in India, 2011, published by the Central Statistics Office, nearly one-third of the elderly reported an illness. The most common chronic diseases related to the heart, urinary tract, diabetes, hypertension, joints and ulcers; broadly in that order. Treatment for most of these is home-based and not hospitalization. So, regular health insurance does not cover these. Further, about six elderly people in every 100 suffer at least one disability. These are also not insured in a mediclaim. Alzheimer’s and other mental diseases are spreading rapidly but are generally excluded from insurance.
Health insurance rates shoot up when you cross 60. One of the A rated plans in the Mint Mediclaim Ratings costsRs.9,800 for cover of Rs.500,000 at age 50. The premium increases to Rs.29,000 after 65.
The solution is to increase the number of senior citizens buying health insurance. This will lower costs as the risk is spread more widely. One idea is to mandate a portion of pension to be used for health insurance. Insurers should consider introducing long-term care insurance that pay for nursing care and assistance. In Germany, buying long-term care insurance is mandatory.
We must take care of the old. After all, we will also get there one day. Bob Dylan, the poet, beautifully expressed: “As the present now will later be past; and the first one now will later be last.”
Finally, on a positive note, the old lady in need of cataract surgery got help from a non-resident Indian who stepped up to pay for her.