My last blog dwelt on the state of the preneed industry and probable reasons some companies folded up and why things are not looking good for them. Just to summarize, I wrote that their problems stemmed from wrong design (actuary), mismanagement and regulation.

For this blog, I will be writing about what to do with your preneed plan.

First, if you are considering purchasing one, it would be very prudent that you thoroughly scrutinize the product you are buying and the provider of that product. Not all preneed companies are shaky; there are a few that remain strong, so it would be unfair to make a general statement. However, many preneed companies are in limbo, and if you decide to get any plans from them, you have to accept the risks that come with it. Consider why you are buying a preneed plan first; why do you want to invest on it? Consider alternatives, as well; if it’s for savings, try other programs like time deposits, treasury bills and, if you have a higher tolerance for risk, try unit investment trust funds or mutual funds. If it’s for protection purposes, get life insurance. You can actually make your own preneed product by combining different programs out there. In fact, I believe you can even come up with a program that is less risky and will yield you a higher growth. If you are thinking of buying preneed at this time, think hard about it.

For those who already have an existing preneed product, what should you do?

If you already have a fully paid plan, there are some options for you. The first is for you to wait for maturity…it really is up to you if you want to take the risk of waiting, or you feel comfortable with your provider. If your maturity is very near, say, next year, you may want to consider holding your plan until maturity. Your second option is to sell your plan. Prior to the preneed fiasco, there was a flourishing secondary market for fully paid preneed plans. You may want to try selling your preneed price at a discount and see if there are any takers. Be prepared to price your plan at a low price, as the appetite for preneed plans today are not too good. Last, you may opt to call your preneed provider and surrender your plan. They usually have a buy-back facility that offers you surrender values. Unfortunately, preneed companies will always give you less than what you have paid for the said plans, so be prepared to take some heavy losses.

If you are still paying for your pre-need plan, you are limited to just three options. First, you may wish to continue paying for your plan. If you are confident your preneed provider is stable and you trust them, you can always brush aside the so-called preneed scare. Second, and depending on how long you have been paying, you may opt to ask your preneed provider for surrender value of your product. Preneed plans have a mechanism in them for surrender value—the longer you have been paying, the higher the percentage of surrender value (from what you have paid). If you are just on your first year, you probably can’t get any money back and charge your investment on “experience.” Last, you may want to cease from paying your preneed plan, and cut losses. If you are very uncomfortable with this whole preneed issue, don’t lose sleep over it.

What I wrote here are the options for those who have preneed or are thinking of getting one. Like any other investment, preneed, despite its hype, is not spared from the rudiments of investment realities. What can be a great investment today can be a horrible undertaking tomorrow—that’s just the way the cookie crumbles! We can always blame providers and the regulators, but that will not bring your losses back. So what’s the solution? I believe the only real solutions will be financial education. Sour investments will always be part of our life, and we must deal with them. In the end, not all our endeavors will yield a negative result, some will be positive. If you have more positive investments than negative ones, then you come out of it okay.

Filipinos must familiarize themselves with financial literacy. We must be comfortable with ideas like asset allocation, diversification, cost averaging, risk-return relationships, etc. Financial information is everywhere, but seeking financial wisdom is really up to you. Dedicate yourself to learning and understanding. You can take a course like the Registered Financial Planner program (www.rfp-philippines.com), join forums like www.income-tacts.com, read blogs, buy books and talk to other people.

Seek knowledge and, as you seek it, you will eventually build wisdom. “Do not forsake wisdom, and she will protect you; love her, and she will watch over you” (Proverbs 4:6).

The preneed issue has been a big concern for thousands of Filipinos. Many are in anguish because they have lost their hard-earned money or they will be losing their investment. I have granted many TV interviews and have given dozens of advice on the issue in the past few weeks.

What is a preneed plan to begin with? The broad definition of preneed is that it is a “security” being sold by a preneed company. It looks and feels like it is an insurance product, but it is not. It looks like a trust product, too, but it is not, either.

In fact, you’ll find the preneed to just “exist” in the Philippines. Proponents of preneed have boasted it to be a genuinely “Pinoy” invention. The closest earlier preneed I know of are those you find in mortuaries in the US, where you can prepay your memorial expenses at a discount.

When you look at the design of a preneed product, it is very similar to an endowment policy being carried by life-insurance companies. With life-insurance companies also setting up preneed companies, the public gets more confused and the general public can’t distinguish the differences. Through the years, preneed products became mainstream investment instruments and have become part of the psyche of Filipinos. With very good branding and marketing endeavors by preneed companies, most Pinoys would dream of having a preneed educational plan for their children.

What happened? Why did preneed companies start to fold up? There are many theories to explain their current predicament. But the current financial crisis should not be used as an excuse by the preneed companies. We all know that many of them were already beleaguered for some years now.

Why are they in trouble?

One reason is that many of the plans that many preneed companies were selling were not “actuarially” sound. According to Wikepedia.com, “actuarial science is the discipline that applies mathematical and statistical methods to assess risk in the insurance and finance industries.” Simply put, we can surmise that some preneed plans were lacking in actuarial studies, a big reason they sold products that may be flawed by design.

Another probable reason is wrong investments by preneed companies. Yields will always be a function of risks. I noticed that many preneed companies are heavily invested in real estate and other riskier and nonliquid investments. We all know what happened to the real-estate industry. Imagine a company that you invested in putting a bulk of its investments in real estate. When maturities fall and you find your investments with minimal growth or, worse, illiquid, how will you meet your obligations?

How do preneed companies really invest their funds? We only hear about their trust funds, but what are in those trust funds? It is great if these companies are wholly transparent with what they do with their plan holders’ monies. By contrast, life-insurance companies are heavily invested in bonds, mostly treasuries.

Flawed design and poor investment decisions are a reflection of management competence. Not all preneed companies are in trouble, although there are just very few of them that are “strong and stable.” When you look at these “strong and stable” preneed companies, you will see that they employ prudent investment strategies, are actuarially sound and probably employ competent management teams. Sadly put, the majority of the players in this industry are in catatonic state, leaving their plan holders shaking their heads in disbelief and grief.

I would like to raise two questions. First, why is it that there are no preneed companies/products in other countries? Could it be that they know things that we don’t? Second, I would want to ask the regulators—why, why, why?

If you have invested in a preneed plan, what can you do now? Further, how should you invest for your pension and education now that preneed companies are in a flux?

Catch part two …

I wish to leave you with these words: Then he said, “Beware! Guard against every kind of greed. Life is not measured by how much you own.” (Luke 12:15 [NLT]).

Knowledge comes by taking things apart: analysis. But wisdom comes by putting things together.

John A. Morrison

The fear of the LORD is the beginning of wisdom,
and knowledge of the Holy One is understanding.

Proverbs 9:10

Want to learn practical Financial Planning? Timeless principles of money management that is proven to work. Nope, you can’t learn it from me as I’m pretty clueless — learn it from this kid. Amazing!

Elijah Offering Video from Elevation Church on Vimeo.

In a few months we will finally say goodbye (hopefully) to the 2nd longest serving President of the Republic. Just how good or bad did GMA perform? Let’s try to look at this on a more objective manner…

The Bad

Corruption has really gone berserk in this administration. While corruption has been ingrained in our society, GMA’s mark for her administration’s record in the area of corruption is, well let me borrow the youth’s language here — ‘Epic Fail’. Her ability to rally the country has always been smeared by allegations of incredible graft and corruption.

The Good

Improvements in the economy. I’m not a GMA fan but we need to give where credit is due.

When GMA took office in 2001, here’s the situation:

Inflation at 7.5 percent; the balance of payments (BOP) was at $2.02billion;the ratio of external debt to gross domestic product (GDP) or how much of the country’s total goods and services annually go into servicing the debt, 72 percent;  unemployment at 20 percent.

As GMA ends her term, here are the marcroeconomic stats:

Inflation at about 3.0% percent; the Balance of Payment stands at $5 billion; external debt to GDP ratio is down to 34 percent; and unemployment level is about 7%.

There are many areas that she still failed in the economics arena such as substantial and sustainable GDP growth; too much dependence on OFW remittances; a fiscal policy that needs to usher real country-side growth, the trickling of economic growth to the masses, etc. But, GMA inherited the country in a really bad shape and the improvement in the economic forefront is definitely a blessing.

GMA would probably come down history as one of the most unpopular Presidents we ever had… but history should be fair to her and us Pinoys should really give credit where credit is due. I am not saying we should forget all the ‘corruption’ attributed to GMA’s administration but we should also remember the good she has done.

I know many people will really disagree with me but I believe that all leaders are anointed and God allowed them to lead to serve His purpose, regardless if they cheated or not or whether they deserve to be in power or not . The Bible is full of stories on how God uses leaders, the good and the bad ones, for His purpose. We just need to see the bigger picture of things, I suppose. Let’s look at Philippine Presidents in this case:

1) Marcos – the country was in chaos, the nation needed to be disciplined. We needed an iron-fist at that time, like a child needed a spanking. Marcos was the perfect guy to do that.

2) Cory – it was time to bring back civil authority to the country and putting an inexperienced widow to thwart a well-entrenched dictator was a strong lesson on humility; further, God honored our being peace-lovers by giving us an unprecedented bloodless revolution.

3) Ramos – the country was already ready to experience growth; we were like a young nation once more and we were ready to spread our wings and try flying again; God put a non-catholic leader in a predominantly catholic nation to tell us that He was God of all and that faith is what is needed, not religion.

4) Erap – with the economic growth came arrogance; the masses were being neglected – people were more concerned about travelling outside the country, condominium units and golf courses. Erap was a big insult to the moneyed elite and the intelligent middle-class; he won by one of history’s biggest margins.

5) GMA – The previous administration left the country in turmoil in a very short period of time; the country needed a hard-working leader who was able to do the tough things that needed to be done and things that men are not willing to do.  With all her faults and criticisms, GMA was probably one of the country’s hardest working leader – her work ethics are unbelievable and her dedication to productivity is something to be admired.

What will the next President’s role be? Not sure, but I know God will use him as He uses all to serve His purpose and according to His will which is good, pleasing and perfect (Romans 12:2).

We expect too much from the government and we expect them to promise too much. Read Pastor Dennis Sy’s enlightening blog on why the government is failing.

CLICK HERE to read the blog.

If you are going through some trials at this moment, I hope this blog can be of some help to you.

People will go through trials — I personally look at trials as tests. When you know that the trial you are going through has a purpose, it makes going through it a little easier.

So why does God allow us to go through difficulties? Here are 3 probable reasons:

1) To accomplish His intentions – God has a bigger plan for us, beyond our comprehension and understanding. We only see things from our own perspective and find it difficult to see what’s in store for us. Read Genesis 45:5-8.

2) To develop our character – Here’s something to really think about: Growth is a painful process. The best teacher is experience and painful experiences either mold us or break us. Read Romans 5:3-4.

3) To discipline His children – if we don’t get the message right and we don’t heed the warnings, we need to learn the hard way. Read Hebrews 12:6.

The next time you go through some trials, smile! God has a plan for you and He loves you!

…con’t.

Aside from its primary function, property and casualty insurance also has other functions.

It stimulates business enterprise—Insurance has made possible and helps maintain the present-day large-scale commercial and industrial organizations. It enables them to use their capital in the development of their business and obtain financial security against risks, instead of freezing business capital just to guard against various contingencies. Because of reduced risks also, capitalists are able to venture into other projects.

It stimulates business efficiency—Since businesses can worry less about losses, they can concentrate more on the prosecution of their business.

Promotes loss prevention—Insurers allow taking risks from well-maintained and quality machineries, equipment or properties.

Investment of funds—Insurers accumulate large funds and these are invested in the economy. Moreover, the funds of business enterprises do not remain static but are used productively, resulting in lesser premiums. Moreover, the process produced by business is reduced, benefiting the public. Although cost of insurance is integrated in the prices of commodities, the amount is significantly lesser than the amount without insurance.

Basis of credit—Credit extension is the most important phase of modern business and is contributed to by virtually all forms of insurance. Thus, in the case of a mortgage upon a real estate, no mortgagee is willing to lend money unless he knows that the value of the property is protected from destruction.

Surely, the foundation and purpose of property and casualty insurance is really much more complex that what was explained here. One also needs to understand about risks and hazards to be able to have a better appreciation of insurance.

Risk is the chance of loss. If a loss is absolutely certain to happen, no risk is involved. Peril is the contingent or unknown event which may cause a loss. The peril is that which is insured against because without such peril, the risk is absent. Examples of perils are fire, flood, accident, theft, illness, etc. The insurance company can choose what perils it will be willing to except the insured from. This is what is also termed as insurable risk. But risks, to be insurable, must meet certain requirements:

Importance—The loss to be insured against should be grave enough to support a contract of insurance. Not all losses would have to be insured. The object must have some economic value, so that losing it would put the insured in some degree of pecuniary disadvantage.

Calculability—The loss must be possible to estimate as to its probability. This is particularly important in order to determine the amount of premium and the amount to cover, so as to protect the insurance industry.

Definiteness of loss—The losses should be fairly definite as to cause, time and place.

No catastrophic loss—This is against the law of large numbers. When large numbers of people are subject to the same kind of losses at the same time, insurance becomes a risk-accepting business rather than a risk-distributing device. The losses of the few are no longer borne by the many who did not suffer a loss. Only small occasional losses are insurable.

Accidental in nature—Insurance is intended to cover accidental or unexpected losses. If the loss is not accidental, sudden or unexpected, there is definitely no risk. Payment made to a party whose loss is expected is contrary to public policy and morals.

The perils that conform to these requirements are proper for supporting an insurance contract.

Hazard, on the other hand, is the condition or factor, tangible or intangible, which may create or increase the risk from a given peril. Hazards are what create a peril, which, in turn, creates a risk. In the insurance environment, hazards are:

Physical hazards—those relating to location, structure, occupancy, exposure to the surroundings and other similar things like inherent vices that make the thing very susceptible to loss.

Moral hazards—those relating to the mental attitude of the person.

Morale hazard—pertains to the attitude or character of a person.

Whew, this blog has turned out to be a mini-lecture on the fundamentals of insurance. Since we pay good money to get such insurance, isn’t it about time we start understanding what we have been paying for all these years? I think so.

MANY of us have some form of property and casualty insurance, or more commonly referred to as nonlife insurance. We probably have motor-car insurance, fire insurance or personal-accident insurance. However, I dare say that so many of us who do have some form of coverage are not really aware what this form of insurance is all about.

When you compare life insurance and property and casualty insurance, you will notice that the only thing similar with them is the term “insurance.” Let’s try to demystify property and casualty insurance.

So what is property and casualty insurance? Property and casualty insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. The definition is clear about how property insurance operates. For the insured, it means that the agreement is merely to help him recover what was actually lost due to the unknown or contingent event. A contract of indemnity is therefore exclusive to property insurance.

Why is there a need for this type of insurance? Well, for starters, it really is a risk-distributing device. A person puts money called premium to a common fund and distributes his risk to the group. There is no way for a person to know in advance whether he will receive compensation more than he has contributed or that he will be merely paying for the loss of others.

The primary goal of a person getting insurance coverage is to assure himself that he will not shoulder the loss alone. He may gamble, take his chance that he may be able to steer his property away from a loss and its devastating effect. But putting a minimum amount, and considering that such amount is the only sum he is bound to lose in case a loss actually occurs, is the logic behind getting protection for your property. However, it is unfortunate that most Filipinos still cling to his fatalistic philosophy of bahala na. When the loss happens, it is already too late.

Risk is an everyday reality. This is the reason people make calculations instinctively to avoid risk. They forget that their own negligence (lack of foresight, lack of skill to prevent loss) is the paramount reason why property insurance is there in the first place.

… to be continued.

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