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When Ramesh Kumar went to his financial advisor to file his tax returns, the advisor noticed that he did not have a receipt for the health insurance premium paid in the previous year. When asked, Kumar said that he had retired from a government organisation during the previous year and as per the organisation's policies, he enjoyed free medical care at a renowned suburban hospital campus for lifetime.
Kumar was lucky since his former employer provided for one of the most critical expense that people face post-retirement. But what about those who are not employed with government organisations? How do they provide for their long-term medical care post-retirement?
According to a recent study by Fidelity Investments, an average 65 year old couple, in USA, is estimated to spend approximately $220,000 on their medical expenses through their retirement. This translates to about Rs 1.3 crore. In India too medical costs are estimated to be increasing at a rate of around 15 per cent.
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Long-term medical care refers to facilities/provisions for medical care post active employment/working phase. This is equally applicable to the organised and unorganised sectors.
People employed in companies are provided with a group medical cover for themselves and also their families. Many companies cover employees' parents on payment of an additional premium to their group cover. In addition to this, many employees also buy individual / floating medical policies to increase their coverage.
For the self-employed; a standalone medical cover is a must. In both these cases, the individual who pays the premium enjoys a tax-deduction on the premiums paid under section 80-D of the Income Tax Act, 1961. While this is extremely important and continuing the same is advisable, these policies only provide coverage for the policy holder's current medical emergencies.
With rising age, the premiums become costly and beyond age 60; the premium cost also becomes prohibitive for certain individuals. So, while a health insurance policy is an excellent must-have for the present medical care; how does one provide for long-term care?
Countries round the world have responded to growing long-term care needs through various measures. For example, in Germany, funding for long-term care is covered through a mandatory insurance scheme, with contributions divided equally between the insured and their employers. In Canada, funding for the long term care facilities is governed by the provinces and territories, which varies across the country in terms of the range of services offered and the cost coverage. In USA Medicaid is a government program that will pay for certain health services and nursing home care for older people with lower income and resources.
In the absence of any such organised facilities or programs in India, how do individuals secure their long-term care like Kumar? During the course of his employment there was a fixed contribution that was deducted from his salary towards this long-term care. This cost was in addition to costs borne for the medical cover enjoyed during employment. This implies that every individual, with the help of a little discipline on their side, can attempt to provide for their own long-term care corpus.
The best way to set-up this corpus is to start a Recurring Deposit (RD) with a bank or any other institution offering fixed-income RDs. A recurring deposit allows people with regular incomes to deposit a fixed amount every month in their RD account and earn interest at the rate applicable to Fixed Deposits. The RD can be funded by Standing Instructions by the customer to the bank/ institution to withdraw the fixed sum of money from the designated bank account and credit to their RD account every month. These RDs should be strictly labelled for long-term care only and should not be utilised for any other purposes during the contribution phase.
Lets take the example of a 30 year old who wishes to set-up this corpus for his retirement at age 60, has 30 years to accumulate his savings. Borrowing the principles of time value of money, an amount of Rs 5,000 saver every month from age 30 to 60 in a RD yielding an average rate of 8 per cent per annum will help the individual accumulate an amount of approximately Rs 45 lakh plus for his long-term medical care. RDs are offered for different maturities ranging from one to five years. The above calculations assume the reinvestment of the RD maturity amounts into FDs yielding an average rate of 8 per cent per annum till the end of 30 years.
You can also opt for other tax-effective instruments or equity-based instruments, based on your discussions with their financial planner, since the investment period involved here is very long and the average returns could be higher.
Typically, interest is compounded on quarterly basis in a RD. Interest earned on RDs is not subject to Tax Deduction at Source, however, the interest earned is taxable. The tax paid on the interest earned can be regarded as a cost which should be met out of the individual's current income. For instance, in the above mentioned example, the annual interest earned on the monthly RD of Rs 5,000 at the end of the first year would be approximately Rs 2,000. At the highest tax bracket, the tax outgo on the interest would be approximately Rs 600, which is definitely a cost to the individual's pockets. But keep in mind that this is for securing a cover in the long-term.
Likewise, in case of a health insurance policy, where in the premiums are paid annually for an annual coverage, if the individual pays a premium of Rs 10,000; he gets a tax-deduction of Rs 3,000. However the balance amount of Rs 7,000 is a cost to him in case no claims are made during the year. Individuals bear this cost as it helps them to safeguard themselves against any medical emergencies in the near future. The tax-cost on the RD interest, too, can be borne in order to safeguard against medical emergencies in the distant future.
WHile it is advisable to invest in an RD to build a corpus for long term health expenses, you must have the financial discipline and ensure that the money invested in the RD is not used for any other purpose.
The author is a certified financial planner
