By Alvin T. Tabañag, RFP ®
The credibility of pre-need plans has taken a lot of beating. Its image is so tainted that majority of Filipinos no longer believe in it as a viable and reliable investment product. Their distrust is understandable because many of them have lost their hard-earned money to pre-need companies which collapsed in succession.
There’s really no reason for the public to fear pre-need plans. These plans are significantly safer now because of tighter regulations and closer monitoring by the government. Supervision of pre-need companies has been transferred from the SEC to the Insurance Commission. Safeguards and more stringent rules have been put in place with the signing into law of the Pre-Need Code. Pre-need companies are now required to put a sizeable amount of solicited investments in trust funds which can only be used for the sole benefit of plan holders. This ensures that they will receive as scheduled the benefits guaranteed in their pre-need contracts.
Advantages of pre-need plans
A pre-need plan is really just a mechanism that allows you to save in advance for a future need like funding for college education or retirement. The concept is pretty simple: you set aside a small amount today so you can receive a bigger sum in the future. As with any investment there are risks to investing in pre-need plans. But there are also significant advantages which should make it a good addition to a well-diversified investment portfolio.
One advantage of pre-need plans is that benefits are guaranteed. Your money’s growth is assured unlike in high return, high risk investments like mutual funds and stocks where you can lose money. Pre-need plans can also be considered as a form of “forced savings” and ideal for people who lack the discipline to save. If you stop paying for a plan you will not be able to get all the money you have paid so you will “force” yourself to complete the payments. You will also have to wait for it to mature to receive the full benefits. Termination or pre-maturity values will only range from 0% to 80% of the full benefits. This should discourage you from using the money for present needs and other unnecessary expenses.
Pre-need plans perfectly match the “tingi” mentality of Pinoys because you can pay via installment. The returns of pre-need plans are comparable to some long-term time deposits but with TDs you need to make a single deposit of a large amount to avail of the good rates. It is also a relatively-hassle free way of growing your money because you let the pre-need company do the thinking on how to make it earn.
At the center of the pre-need fiasco are educational plans. What most of the failed companies offered in the past were traditional or open plans which promised to pay in full tuition fees regardless of the amount. But with skyrocketing fees coupled with botched investments pre-need companies were not able make good on their promises. Thankfully, traditional plans are gone. Now, you can only buy fixed plans, which means a specific amount will be paid directly to you once the plan matures.
Typically, educational plans start releasing benefits when the child reaches the age of 17. It will be paid over four, five or seven years depending on the plan. The benefits of most plans increase by 10-25% every year to keep pace with inflation. Extra features may include cash for elementary and high school education, insurance coverage, a graduation gift and a cash reward for honor students.
While a pension plan is designed as a tool to accumulate funds for your retirement it can actually be used to save for other goals such as buying a new house or car, vacation abroad, your child’s wedding or initial capital for a business.
You can avail of the benefits from a pension plan through various options. One option is a lump sum payment where you get paid all the benefits when the plan matures (which can be anywhere from 5 to 30 years). You may also opt to receive a monthly pension over a fixed period or up to a certain age. Some plans pay you a small amount at regular intervals for several years and then give a lump sum upon maturity. Additional features of pension plans may include life and accident insurance coverage, hospitalization benefit, transfer of ownership, a low-interest cash loan facility and dividend payments.
Sooner or later we will all breathe our last and unless you plan to be thrown out to the sea your family will have to bear the cost of memorial and interment or cremation services. And these can be very expensive. Buy yourself a life/memorial plan so that your family will only have to grieve over your loss and not worry about the financial burden. Your grieving family can also take advantage of the provider’s professional service administration.
Traditional life plans render the appropriate memorial service and largely depend on the type of casket you want to avail. Some plans pay you the cash difference if the actual cost of the memorial service is less than the plan benefit. Fixed value life plans provide your family with a specific sum which they can use as they see fit. The plan benefit usually increases every year. Add-on benefits of life plans include transferability, assignment to any deceased person you chose, insurance coverage, hospitalization benefit, and return of premium.
Buying your pre-need plan
You can buy pre-need plans not just from pre-need companies but from life insurance companies as well. Check with the Insurance Commission (www.insurance.gov.ph) if the company you are dealing with is an authorized dealer.
Buy the pre-need plan which you can afford and not what the agent tells you so you won’t spend sleepless nights worrying how to pay for it. The earlier you buy the pre-need plan the less expensive it will be. Plans that mature in 15 to 30 years have the lowest premiums.
Pre-need plans can be paid through spot cash or annual, semi-annual, quarterly or monthly installments. Payment period can range from five to 20 years. Choose the payment mode and period that best suits your budget. If you want to get substantial discounts (5-10%) pay one time or annually. To get the best value for your money always compare pre-need plans from different companies before you settle on one.
Alvin T. Tabañag is a personal money management coach and a Registered Financial Planner®. He is a member of the RFP Institute and the Financial Planning Association (USA). He established Pinoy Smart Savers Learning Center to spread a culture of saving among Filipinos through practical financial education. Alvin regularly conducts seminars on money management to a broad range of audience; from low-income wage earners to middle-class workers, professionals and business owners. You can find him at www.pinoysmartsavers.com.