Are all pre-need products worthless?

Here’s a public MoneySmarts confession. I have a fully paid educational plan with College Assurance Plans, and it’s the open-ended type. Yeah, silly me. Even before CAP officially admitted to its problems, I had heard of the dangers. Some reporter friends who were covering Congress at that time had obtained documents that already indicated that the country’s largest pre-need company was in trouble. And yet I still paid every centavo under the plan.

I still remember the day I went to CAP’s Makati office to get the certificate that I thought would get my child into the best schools in the country. As I was waiting for my number to be called, I sat next to a family that opted to get their benefits way ahead of schedule. The father, obviously an overseas Filipino worker, said he knew he would get only around 60 percent or thereabouts of the maturity amount. He didn’t exactly say it, but I think he also heard the rumors.

I guess he got a better deal.

CAP and other pre-need firms that went bankrupt burned a lot of Filipinos and damaged the reputation of the industry tremendously. Does this mean all pre-need products are worthless?

Personally, I worry about writing off something based on fear, just as I worry about getting into an investment based on greed. As one of those who got burned, my first instinct is to lump all pre-need companies in a miserable little ball and consider them unfit for Filipino consumers. But to be fair, Filipino savers need to take a closer look at the industry to make a better judgment on whether all pre-need products are indeed worthless.

Philamlife Pres. Jesus G. Hofilena, in a presentation made for the Asian Institute of Management’s JBF Center for Banking and Finance, said only a fifth out of over five million plan holders are in trouble. (Excuse me while I nurse my broken pride, being one of those victims :p)

We are in trouble because we opted for traditional education plans that promised to pay the tuition fee whatever level it would be at the time of maturity. (Wouldn’t you think this was a very good deal?)

At the same time, poor management actions of these companies weakened their financial position like investing too much in real estate. The government deregulated tuition fees causing school expenses to skyrocket, adding more kindling to the fire. Investment yields were going down and cracks in the regulatory framework started to show.

However, Hofilena believes that the industry is confronting serious issues facing it, like solving trust fund deficiencies and educating and professionalizing their sales force among others. He believes the tougher regulatory rules will force the industry to consolidate. You know, survival of the fittest blah blah blah.

Speaking now in hindsight, I realize that because of my investor profile, I should never again buy an educational or pension plan because returns are too low for me. But such products also have a place in the life of many Filipinos, who need to be forced to save for such a big expense as education for their children.

Don’t be fooled into thinking you are “investing in your future” with pre-need products. You are in effect paying these companies to collect your money from you, so that you can get the same amount by the time you need the money, plus a little bit more earned in interest. But hey, if that’s how it works best for some people…better low returns than no savings at all, eh?

In its article today, Citibank answered a reader’s question on preparing for the high cost of children’s education. When considering educational plans, make sure you:

Check the stability of the company. Also, compare the plan with other plans offered by other pre-need companies. See if the monthly premiums are reasonable. Generally, the more time you have until your children go to college, the cheaper the premiums will be. If you have lesser time until your children go to college, such as when they are already in middle school or high school, consider shoring up money for your own fund and doing your own investing.”

The best tip from the article is to set up a separate account for education expenses and to add to it monthly with total commitment. Never dip into this sinking fund; consider it sacred. Just the action of setting up a separate account does wonders for discipline and commitment.

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