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!