The camera was no longer running yesterday at the ShopTalk set at ABS-CBN and the crew were already clearing up, but Pia Hontiveros, Alvin Tabanag, Randell Tiongson and I were still huddled together. This time, the words were less subdued and (at least for me!) we were less self-conscious (haha).
The subject that kept us engaged in a lively discussion: the pre-need industry’s irresponsible boondoggling through the years that led to its demise and what policyholders can do now.
I have been getting loads and loads of email from people I don’t know, with tones ranging from bellicose cries to resigned acceptance, asking about what to do with their pre-need policies. Let me spell out the answer to their questions in terms no one will misunderstand.
Should people still buy education plans and other pre-need products?
No.
Am I bad person for saying this because this will hurt the industry even more?
Up to you to decide! At the end of the day, consumer protection should be the paramount concern.
Any industry that sells products to individuals (retail) need the confidence of the public to grow and survive. Banks, financial services companies and pre-need firms are especially vulnerable to negative publicity. I am not saying the industry will not recover. I am not a financial prophet. But why risk it?
I’m a pre-need policyholder. What now?
There are three parts in the answer to this question.
First, how rocky is the company you bought from? Rule of thumb in any shakeup in the financial sector: if you aren’t invested in the top three biggest companies with global presence, write it off and err on the conservative side.
Second, assuming that you’re not invested in the top 3, how many years have you been paying? If you are into it one or two years for a five-year policy for example, stop paying and learn from your losses. Learn, not stress about it everyday. It’s not worth the wrinkles.
If you have a couple of months or a year or two to pay, finish paying if you have the extra cash (you don’t have to go hungry just to pay). Then build up your education fund through another financial instrument. Save more aggressively. If the company pays eventually, consider that an extra bonus.
Should I get their early payment offer?
Not a lot of people realize this: the more policyholders get this early payment offer, the more the company will benefit. You can choose to be the guy who allows the other guy to get his full payment, or the other way around.
***
I was a young reporter back in the late 90s covering the financial sector for a major business newspaper and sadly, quite a lot of experts already knew the problem back then. But they didn’t want to be quoted. They didn’t want to “bring down the industry” or “piss off the regulators and industry players.”
I wonder if all those reasons are worth the pre-need policyholders’ pain now.
There’s definately a great deal to learn about this subject.
I really like all of the points you have made.
As a plan holder of CAP, I too got burned on this so I know what it feels like to get taken for a ride by greedy company executives. For those thinking of getting a pre-need plan, the pre-need company will invest your money on stocks and bonds anyway, so why not learn how to invest in stocks and bonds and do it yourself?
One thing I would like to point out with your article is that you made no mention of life insurance. Some of your readers might lump pre-need plans with life insurance when this is not quite precise. I have heard of pre-need companies failing, and of banks failing, but I have not yet heard of a life insurance company doing so. It seems that whatever regulations are enforced for the insurance industry should also be applied to the pre-need industry for people to start trusting them again.
These institutions will just use your money to invest in high risk, high return financial instruments, and they themeselves take a cut from your earnings. So why not just manage your funds yourself. That is if you have the time to do it.
Hi Lily,
Great question and one that requires quite a bit of thinking and cross-checking for me. Based on Philam Plans’ latest report to the SEC, their liabilities are well-covered by their fund. That means they claim that they have the money to pay you when your claims are due. What’s truly amazing after this latest financial debacle is that they are still standing even after AIG collapsed. That’s something you don’t see everyday.
Having said that, as a financial journalist who is trained to look for cracks, I would say use this time to grow your money in other ways so that you can have a plan B just in case things go wrong. If there is something I learned, it doesn’t hurt to have a back-up plan, because in this day and age, nothing is definite. This is where diversification is important.
Bottomline, if its fully paid, let it rest there until the time you would need it. But diversify and save more and invest more so that you have a backup plan, just in case. Hope that answers your question Lily!
hi Ms. Salve! i watched Shop Talk kanina where kayo ni Mr. Efren ang guests. I’m sooo glad i switched to ANC.
Anyway, just a quick question: can we consider Philam Plans as a good/stable company? I have a pension plan with them, fully paid na, and it’d mature on 2017.
hi hachiko, i love the plain language. Tell it as it is!
No-namer: Commissions at 60%. So that’s really true ha??? I don’t know whether I want to wring my friend’s neck dry or congratulate him for being in such a high-paying job! But it seems that such high rates really is not sustainable. Thanks for answering my very kulit questions. Hope you can continue to enlighten us, your comments are very, very helpful.
Pre-need is dead meat. Don’t even bother with it. Too much pork given to sales agencies leaves you with too little trust funds and no money when tuition is due.
Horrible regulation and risk management practices too. Imagine they sold open-ended education benefits hoping they could lobby govt to limit tuition increases forever! And products designed at fantastic yields of 15% a year. It was okay in the ’70s and ’80s when the value of money sank fast. But now with so little inflation and just 5% yields after-tax, oh well, they’re dinosaurs.
And let’s not get into all the stories of fraud / estafa surrounding Legacy, CAP, Platinum etc. Simply horrible. Good riddance!
Hi Salve! Commissions can go as high as 60% for pre-need plans in the first two years. Then with tapering or no commissions from 3rd year onwards. But there are some companies who give a flat commission over the whole paying period to encourage collection. Roughly, this translates to 30% of the contract price going to commissions. A certain percentage also goes to incentives. The remaining funds are divided into operations and trust fund requirements. Can it be lowered? Definitely! But based on our experience, it’s hard to implement. Try asking your salesforce to produce more sales but giving them lower commissions. It’s like telling them to work harder to get the same commission amount they got before. But admittedly, lowering commissions alone would not save the industry, it has to be done together with other actions.
Now, before actuaries rain down fire on me, no one can predict yields right? But they must make assumptions, much like investment managers when making investment decisions. So the actuaries present their computation to the preneed company who then sends it over to SEC. If SEC agrees with the computation, based on their own actuarial validation, then the product is a go. As I said, if the bull disappears and the bear comes around, the pricing model becomes null and void. So can this by itself, sink the industry? No again, it must be a confluence of factors and events.
Hope I was able to answer your questions =)
hi no namer, thanks for your very well thought-out reply. i love long posts, dont apologize!! have a couple of questions, though. how big were the commissions? do you think they could have scaled these down and saved the industry from keeling over? On the actuarial assumptions: are you saying that the actuaries made mistakes?
Hi Salve! Just wanted to comment on your reply to audi. I worked for 11 years in a pre-need firm so I do have an idea of how things could have been averted. There are many reasons which somehow are connected.
One, the trust fund requirements set by the SEC for each year of payment. I really found it ridiculous before and was glad to see our company not follow it beginning early 2000. I read recently that the SEC has revised this and I think it just might work for the industry. The stumbling block is that with bigger trust fund allotment at the early years, commissions will be affected. If salespeople won’t be too greedy, this won’t be too much of a problem.
Two, open ended plans. Almost all companies who sold open-ended plans are now closed. The remaining few who sold such products up to today are those reported in the news already. My former company saw this as early as 1980’s. When it introduced its educ plan, it was never open-ended. Its open-ended lifeplan was also discontinued in the 80’s. Open ended plans are only good partnered with regulations and an extended bull run. Two things which can change any year.
Third, actuarial studies. Pre-need products are a result of actuarial studies. But as with any mathematical computation, a wrong assumption negates the whole computation. What specifically? Yields on investments. Lower than expected yields may put the products in trouble, but projecting a lower yield, though safer, makes the product unappetizing to clients…. talk about between the devil and deep blue sea.
Lastly, I believe the true calling of pre-need is in service. Give a service, and not just cash, will make it distinct to other products e.g. insurance, UITFs, MFs, etc. If the industry goes back to its roots, it will survive.
Sorry for the long post =) God bless your new endeavor!
Alvin, I’ll wait for that. I understand the concept. Better get a pre-need instead of spending your way through what little you have. But what if you lose everything in the end? Mutual funds, by the way, already have the “tingi” system. So does online stock investing. Hmm you’re giving me an idea for a good blog post hahaha!
hi paetechie! you have to teach me how to do this stuff without a truckload of IT support in the next room hehe. hmm, on the other hand, the H is much better than the truckload I had in the other blog hahahaha.
hi audi, sorry for the late reply. your comment made me pause to think. was there a way this crisis in the pre-need sector could have been avoided? as i said in my post, a lot of people knew this could have happen more than 10 years ago. in the financial industry, people sort of instinctively knew the regulatory environment wasn’t that strong. financial people would talk about the weaknesses in hushed terms, never wanting to piss off the big industry players, but also sort of dreading a pre-need industry “run”, so to speak. how do you think this could have been avoided?
Hi, Salve, Randell. In the Family Finance 101 seminar on July 11, I’ll discuss a few reasons why a pre-need plan is still a good way for Filipinos to save for the future considering our “tingi” mentality.
at last i’ve found you (thru you know who) 😛
Hello Salve. I am not a big fan of pre-need and i am somebody who may want to take a piss on the regulators and industry players, so to speak. I know a lot of people who have invested so much, only to be screwed by these con artists. Many young kids will not finish schooling because of these people. Is the government doing something? I don’t think so, as looting (and perhaps sex video scandals) are their only concern.
There is no clear answer. It will take a long time before we have a transparent and responsible insurance industry. Maybe strengthening the regulator is one way, the way they did with BSP. Maybe having a well informed investor is another way. But even so, it will still be subjected to recurring crisis. That is what fear and greed is all about. There will always be suckers and con artists.
Thanks Randell :), After I uploaded my blog, I saw yours! haha. Great minds think alike!
Hi Salve, great new blog! I am sure it will be just as successful as Money Smarts. Yeah, that was such a conversation wasn’t it? I blogged about it, looks like at the same time as you, haha. I wrote a long article on preneed, 2 parts in Business Mirror.
Congratulations on your new blog!!! God bless you.