Pre-Need Problem (part 1)By Randell Tiongson on March 12th, 2010
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]).