Pre-need problems, part 2By Randell Tiongson on March 15th, 2010
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 investment forums, 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).