The expectation of life at birth increased by six years for men and eight years for women between 1990 and 2008. Since mortality rates dipped most in infancy and early childhood, the increase in expectation of life for young adults was more modest, in the range of 2-4 years.Despite this apparently small increase, it turns out that there has been a sharp drop in the probability of dying between the ages of 20/30 and 60. For men, the probability of dying between the age of 20 and 59, before life insurance cover runs out, has dropped from 1 in 3 in 1990 to almost 1 in 4 in 2008. There has been a corresponding drop in the probability of death for women, from more than 1 in 4 to well below 1 in 5.
So, unless the IRDA presses insurers to cut premiums, or extend life cover till age 70, life insurance will become a much more profitable business. Life insurers will be able to reap where they have not sown.
However, while the decrease in the probability of dying for young adults translates into huge gains when aggregated, the effect on individual willingness to bear risk is likely to be negligible. In short, the rise in life expectancy affects mainly the supply side, in particular the cost of providing insurance, while leaving demand pretty much unchanged.
But there is also another side to the story. Men and women aged 60-64 can expect to live another 15-17 years, and those who are yet alive ten years down the line will find that they have another 10 or 11 years to go.
So the major change, so far as consumers of insurance products are concerned, is that they ought to think of investing more in annuities, to provide themselves with a steady stream of income until their death; though of course the need for annuities will vary with the availability of pension, for the pensioner and his/her surviving spouse.
For those who have managed to save Rs 20-30 lakh at the end of the day, by far the best bet is LIC's Jeevan Akshay, which gives an income of around 9.3 per cent in perpetuity at age 58, followed by the Postal Department's Senior Citizen's saving scheme, which gives 9 per cent on a five-year fixed deposit. At present rates of exemption/deduction, incomes of about Rs 20,000 a month are tax-free until the age of 65, and Rs 30,000 a month thereafter.
If banks now start offering 10 per cent plus on fixed deposits, go for them, but only for shortterm gains. Banks are of little use in the long term. Assuring oneself of an income on the basis of a ‘reverse mortgage' on a self-occupied house is a good option only for those who have no other option. Reverse mortgages typically provide an income for only a certain number of years; for this as well as other reasons, they cover your bank's risk rather than your own.