The Prodigal Pre-Need Industry What Should One Consider When Buying A Pre-Need Plan

By Gerald C. Cantor, CPA, RFP graduate

We have heard a lot of sad stories, of shattered dreams and of broken promises with the closure or rehabilitation of one pre-need company after the other. Each time a pre-need company closes, we receive the same controllable and uncontrollable excuses such as the financial crisis, mismanagement of trust funds, weak government regulation, etc.

I attended the first day of public hearing conducted by the Insurance Commission (IC) and Prudentialife with regards to the latter’s proposed rehabilitation plan. I was wearing various hats that day: firstly, as a former Sales Counselor representing my planholders which includes my family and close friends; secondly, as a planholder myself; and lastly, as a “concerned” financial planning graduate and advocate.

People from all walks of life braved the heat of the sun to hear what will happen to their hard-earned savings. Most of them simply wanted to get their money back. “We do not want your complicated explanations and plans, just give us our money!” one exclaimed.

I have witnessed a similar situation when I accompanied my dad and aunt several times to the Philippine Deposit Insurance Corporation (PDIC) office to file their deposit claims against a closed rural bank. I have seen surprised, disappointed, worried and angry depositors lining up and anxiously waiting and asking when they will get their life-time savings back.

Why do Filipinos save in a pre-need plan? People obtain a plan for three major reasons: to setup funds for retirement (i.e. pension plan), to provide for the childrens’ college funding (i.e. education plan), and to have a worry-free funeral service upon death of a loved one (i.e. memorial or life plan).

Unlike other investment products offered by banks and other financial institutions, a pre-need plan is deemed simpler to understand. You pay a fixed premium amount for a fixed number of years. In return, you are “guaranteed” a cash benefit with some money back features at a designated maturity date. People think that they don’t have to worry about the economic and other environmental factors which may impact their plans.

Also, a pre-need plan forces you to save and is likened to a time deposit with what seemed to be better interest income or return of investment. Considering the time value of money which financial planners use and sadly, ordinary Filipinos ignore or do not know, a pre-need plan can give you an average return of 4% to 7% per year. Of course, what Filipinos are missing here are two major considerations: the inflation rate which is around 3% to 5% and the average annual increase of tuition which is around 10%. Lastly, Filipinos basically rely on their Sales Counselors, who are usually their relatives, friends, neighbors, former colleagues, etc., to guide and educate them on how to financially secure their future needs. A common Filipino trait is to accommodate people who are close to them and rely on them regardless whether they are experts or knowledgeable of financial planning.

After considering the psychology of the Filipino saver or investor, people will still buy a pension, education, and a memorial plan just like they will still deposit their hard-earned money in a rural bank. It is therefore, best to inform the public of the latest developments in the pre-need industry and also provide some personal finance tips when buying a pre-need plan.

Industry changes

One of the most important changes in the pre-need industry is the enactment of Republic Act No. 9829 in 2009 or is commonly called as “The Pre-Need Code of the Philippines.” The major objective of the policy is “to regulate the establishment of pre-need companies and to place their operation on sound, efficient and stable basis to derive the optimum advantage from them in the mobilization of savings and to prevent and mitigate, as far as practicable, practices prejudicial to public interest and the protection of planholders.”

All pre-need companies are now under the supervision and regulation of the Insurance Commission (IC). The IC is deemed to have more capabilities and expertise in regulating this kind of industry as compared with the Securities and Exchange Commission (SEC). In relation to this, according to Gregorio Mercado, president of the Philippine Life Insurance Association (PLIA), “in the 117 history of life insurance in the Philippines, there has never been any instance of a company folding up and collapsing.” I wish we could say the same for the pre-need industry. The Department of Finance is also planning to increase the paid-up capital of pre-need companies five times more where they are at now. According to Finance Secretary Cesar Purisima, the increase was necessary “to better protect the investments of thousands of consumers from inadequately managed and poorly capitalized pre-need companies”. The IC is currently studying the plan.

The Bangko Sentral ng Pilipinas (www.bsp.gov.ph) through its Financial Sector Forum has released some practical reminders (both in English and Tagalog) to protect the public’s financial investments. My only suggestion with these reminders is that these should be “pro-actively” promoted through all media/channels for the investing public’s sake. Some of the reminders which are applicable to the pre-need industry include the following:

• Know the financial product that you plan to invest in, particularly the terms and conditions in fine print. Do not invest if you do not understand the product or any of its terms and conditions;
• Make sure that the actual investment product/investment, if sold in the Philippines, is registered with the Securities and Exchange Commission (SEC) or has the prior approval of the Insurance Commission (IC) in the case of insurance products (Author’s note: “pre-need” products should be included here as well);
• Check the background of the issuing entity and the people behind it;
• Investment products/instruments are not insured by the Philippine Deposit Insurance Corporation (PDIC). In relation to the last point, what seems to be lacking in the Pre-Need Code is a “plan insurance protection scheme” similar to PDIC’s. Would it be “financially reassuring” for a planholder if the government can secure 100% of your plan’s contract price (i.e. total plan payments) in case the pre-need company closes or goes under rehabilitation?

Every time we receive a call from our Sales Counselor relative or friend offering us a pre-need product, may I suggest some practical tips before you buy a plan:

• Self-examine your current financial condition and clarify your financial goals. Before investing, do you already have an emergency fund? Have you paid up in full your credit card and other personal debts? Is your priority to save for a specific purpose, i.e., for your children’s education, for your retirement, for family’s insurance protection, or for future funeral expense?
• Assuming you are ready to invest, do you know your investment objectives and risk appetite (i.e. are you a conservative or adventurous investor)? Have you studied and considered the risks and returns of other investment alternatives such as stocks, mutual funds, unit investment trust funds, bonds, variable insurance, among others?
• Should you still prefer to get the pre-need plan, ask your Sales Counselor to provide information about himself, the company, and the product. It is important to know his qualifications, educational background, and insurance/ investment/financial planning experience. On the company, ask about its management, affiliates, trust fund info, and financial condition. On the product, ask extensively about the benefits and terms and conditions.
• Check the Insurance Commission website (www.insurance. gov.ph) for the latest list of pre-need companies that were granted licenses to sell. As of May 7, 2012, there are only twenty (20) pre-need companies that have licenses. Please take now that not all are authorized to sell the three plans (i.e. life or memorial,, pension and education plans).
• Browse the company website and Google search about the company for any relevant news or updates. Check also about the pre-need industry, in general.
• It also pays to find a talk to a financial planner or coach or read about their blogs and online advices. Financial planners are like doctors and lawyers who can give you good advice with regards to financial planning and investments. Please check the following helpful websites: Registered Financial Planners at www.rfp-philippines.com, Personal Finance Advisers at www.personalfinance.ph or well-known personal finance coach, Randell Tiongson’s blogs at www. randelltiongson.com.

After doing an extensive research and you still want to buy a pre-need plan, the last question to ask yourself is “can you sleep soundly at night not worrying about your pre-need investment?” Are you willing to forgive and give another chance to the “prodigal” pre-need industry? Hope this helps.