Should you buy a pre-need educational plan?
By Randell Tiongson on June 23rd, 2009No.
When I am asked if people should take out a pre-need educational plan for their children, my answer is no.
Here are my reasons:
1) Too risky – too many pre-need companies have folded up so there is something seriously wrong with the way the pre-need industry operates. CAP, Pacific, Professional, Platinum… the lists goes on and on. Regulation for this industry is lax and it makes you wonder how pre-need companies design their plans.
2) Horrible returns – not all pre-need companies are unstable, there are still 2 or 3 very stable pre-need companies. However, when you compute for the internal rate of return of their plans, it isn’t really encouraging. If the inflation of tuition fees averages between 8 to 12% p.a. and the return on your educational plan is about 4% p.a., you can be sure that the benefits you will get upon maturity is severely insufficient.
3) Unfair policy provisions – if you skip your payments or decide to cash your pre-need policy, you’ll be aghast at what’s left for you, assuming you can still get any.
Pre-need proponents always argue that a pre-need product is a great program since it forces you to save. Do you know the lapsation rate of pre-need policies? It’s really, really bad – meaning, people who actually buy pre-need policies can’t fully pay their plans, or at least a lot of them. Here’s my thing: if a person can’t discipline himself to save money for something important like education, he can’t discipline himself into paying the payments of his educational plan; if a person is disciplined enough to pay his pre-need payments, he is disciplined enough to invest his money in better investment programs.
There’s a cardinal rule which finance geeks like me call the ‘risk-return’ relationship. The higher the risks are, the higher the potential yields are and vice-versa. There is no such thing as a low risk – high yield investment, you can bet that it’s a scam. On the other hand, is there such a thing as low yield – high risk investment? Who’d be in his right mind to invest his money that way? Try investing in a pre-need product… ouch!
I like the article because you tell it like it is. BGL
Randell,
I loved the phrase “…if a person can’t discipline himself to save money for something important like education, he can’t discipline himself into paying the payments of his educational plan…”
In the Philippines, there’s just too much distraction for spending, lax family lifestyle (e.g. there’s always a “yaya” to look after the kids so let’s go party), colonial mentality (which leads to “…keeping up with the Joneses…”) — do I continue? So, how does the ordinary Filipino get away from these “bad habits” and “temptations” so that he/she can be disciplined to save for the family’s future?
Raffy
this is great bro. confirms what our thoughts were all along. thanks.
i agree…thats true. Its still wiser to invest in mutual funds, esp for long-term educational funding. Though its still a fact that some people still want the guaranteed, more “popular” & “educ plan” that pinoys got used to. That’s why we’re here as financial advisers…nice website, randell…God bless!
Well, so far like what you’ve said in RFP Day 8, balanced mutual funds are the way to go if people want to invest or save now for education.
I am just wondering if it is still possible for the pre-need companies to restructure themselves.
Randell, hi , i belong to rfp 1. I can’t agree with you enough. I wish i knew this way back in the early 90’s. But then again, there wasn’t enough “experience” with pre-need companies back then to make a sound judgment other than looking at the supposed “stable background” of the plan’s proponents (which they were also using as marketing tool). Yup, bought pacific plans and diligently paid it for several years and their reneged promise hit me at the time i really need it.
Can you do a comparison chart of the different pre-need educational plans vs. what you propose?
I’ve written an article about ‘Do It Yourself’ Educational Plan. It actually gives you choices on how to approach Educational Fund need – http://financial-planning.gigabyteshosting.com/index.php/2011/05/educational-plan-options-in-the-philippines-a-mothers-dillema-part-1/
I agree with you Randell. After seeing how CAP, Pacific Plans and other educational pre-need companies get away with not fulfilling their obligations to their subscribers, educational pre-needs really has become a high-risk low-return investment.
It makes more sense to get a pre-need memorial plan.
another nice and informative article batchmate.
YES i agree, DO NOT BE FOOLED by the sweet words of pre-need education plan agents. I am one of the many victims of these pre need edu insurance. I am a victim of CAP, my daughter have already graduated 3 years ago but until now they only paid me equivalent to one semester tuition. I am also a victim of TPG pre need edu insurance. My son have graduated from college 2 years ago but until now they have NOT PAID me a single centavo. Another son now a 3rd year in college, CAP have not paid a single centavo for my son’s tuition.. PLEASE DO NOT BE A VICTIMS.
Very straight forward…nice one Randell c”,)
I invested in a mutual fund 5 years ago and my money has more than doubled. Mutual funds should step up and fill the void left by these pre-need scams. the thing is most of mutual fund co. s also have pre-need rackets of their own… haaay!
how will you know if it is a preneed or an insurance company?coZ thex have the same rules and policies?pls gve me a name of preneed company and insurance company.tnx
Wish to invest in mutual fund as a substitute for the pre need educational plan, how much is the beginning amount and interest and what are the requirements and guidelines?