Noet Ravalo answered a reader’s question on pre-need plans today in INQUIRER.net:
I have heard so much about pre-need plans — some good but a lot more of what I hear seem scary — and would like to know more without hearing a sales pitch. I have a very young family and I was wondering if it is time to consider an educational plan for the kids and perhaps a memorial plan for my wife and myself. If you think they useful, what should I look out for? — Ronald
Pre-need plans, especially for education, pension and funeral expenses, are financial planning instruments in “tingi”. They break down the costs of children’s education, retirement and funeral expenses. Buying in sachets, of course, is always more expensive than buying in bulk.
Recently, pre-need plans in general have suffered from a tarnished image because of the failure of companies like College Assurance Plans, among others, to deliver on their promises. Comments from my previous posts on pre-need plans show that there are a lot of victims who are hurting. Read this post on Pryce Plans and my article on College Assurance Plans here. I got swarmed with comments showing that the public is divided on whether all pre-need plans are worthless. From firsthand experiences showed in that post, however, it is clear that if you plan to buy one, better be extremely careful on which company you buy it from.
Noet wrote a very useful buyer’s guide without the sales pitch 
to help us avoid the usual mistakes.
Do you have the discipline for saving a minimum portion of your income? Having an “obligation” in the form of monthly pre-need payments is at least a disciplined manner of saving. On the other hand, not having such monthly obligation may give you better leeway to offset unexpected expenses (i.e., medical) so you don’t feel unnecessarily constrained.
Do you have the capacity to evaluate financial opportunities as they come along so you can try to beat the returns of a pre-need plan? If not, then you really are back to letting others handle what is necessary for you to cover a future expense. This is not a choice; it simply is the basic reality.
If you have the income stream, the fortitude for saving, the technical skills for investment decisions, you still have to hurdle what is perhaps the biggest constraint faced by anyone: do you have the time to do this or is your family best served by letting others manage it for you?
If you’d rather hand over your money to someone else and get someone else’s services to help you prepare for your financial needs, then you start asking the following questions:
- Is the company sound?
- Does it give good service to its customers? (When grieving for someone or in shock, the least you want to do is untangle customer service issues)
- Can you meet the monthly payments so that your overall investment will not be forfeited?
I know the feeling of being deluged by all the financial mumbo-jumbo when choosing a pre-need product. Sometimes, you just want to get it over with. Besides, you tell yourself you are buying it from a friend anyway. Snap out of it and remember that it’s your hard-earned money. Postponing the decision so you can take a better look at the figures and get more information about a company is ALWAYS a good decision.
An informed buyer makes fewer mistakes.
More links to related news articles:
Retirement plans versus mutual funds
How to choose an educational plan
Many Filipino families are unprepared for the rising costs of education. Photo credit: AFP.
March 10th, 2008 at 3:22 pm
what is the difference in investing a life insurance policy to a Pre-need company and also on an Insurance Company. wich of them is more reliable.
December 10th, 2007 at 11:57 am
yesterday a Danvil sales agent at the SM Megamall lobby persuaded many passersby to get to know their disciplined ’savings plan’. One of the requirements is that we should all be credit card holders. So the plan goes, we will have to make an initial savings of P6,650 for thru the credit card, which will be transferable to our account when we have opened an account in any of their tustee banks like BDO, Metrobank, Equitable & Deutche Bank. Afterwhich, we will deposit our monthly savings in the bank for 7 years, which cannot be withdrawn until the 15th year. The idea is a disciplined non-withdrawable savings for future use. Tha plan has an additional benefit of accidental death, disability and dismemberment insurance protection in case something happens to me within the 7-period savings. I minimum addition in a ‘rider’ plan will also give me the same protection if something happens to me within the next 8 years of waiting for the 15th year, when the plan value can be withdrawn. I have no problem with setting aside some money at the bank every payday. But how will i be assured that Danvil which claims they are tied up with Berkley International is a sound company and that everythinmg in this disciplined savings plan is in order? I felt somewhat uncomfortable about being given a slot only for the day, and that i cannot avail of the savings plans if I did not avail it yesterday? isn’t there a problem there? i asked to be given time to consider it, then will just come back in a week, but then i thought P800++ disciplined savings in 1 of their trustee banks wont hurt too much. At least it still goes on savings and not gastos. Is Berkley International & Danvil really partner savings plan companies? Are they registered at the SEC? Please advice. Thanks!!
November 26th, 2007 at 2:41 pm
hi martini,
i’m also poor in math (hehe) but an insider from the industry admitted just as much. the returns from pre-need education plans are really not competitive with other investment plans because they have to guarantee their returns. The risk versus return principle is true here: when you take on more risk, you have THE CHANCE of getting higher returns, but also GREATER losses.
Some people go for pre-need plans because they can’t discipline themselves enough to save regularly. Others who can manage their funds go for mutual funds, trust funds and other schemes to prepare for their children’s education. The answer to your question lies in your money personality. So you alone, my dear, can answer your question.
If you decide to invest in educational plans, make sure you research first on the company you are investing in. CAP was the top seller during its time, and yet its now virtually crippled and can’t pay its customers. So be very, very careful.
If you decide to go the mutual fund way, choose the company well. Don’t just chase returns. Then keep your eyes close to the ground and stay tuned to market developments. Close your fingers and hope that on the year you need your children’s education money, the market is going up!
.
To minize the impact of adverse market developments, diversify your portfolio too, into bonds, stocks, real estate, etc. Life is interesting, isn’t it?
November 26th, 2007 at 1:08 pm
Salve, my post is rather late but I need your opinion here…
I heard (from an actuarial science grad) that educ plans are the most “walang kwenta” of all the pre-need plans (well, except for the traditional educ plan which is no longer available). My son’s educ payments were: $1,310 x 5 years. The return was a total of $10,000 beginning from the 16th year (spread over a 4-yr period). I tried to compute for the compounded interest rate and all I got was a measly 3.5% per year! (Pls. check since I’m poor in math!)
Since I’m expecting another child very soon, I tried comparing the returns if I placed P50,000 every year for 5 years in an equity mutual fund with an average return of 20% every year. At the end of the 10th year, the value would be P1.1 million. Of course, I am aware that the returns are not the same every year but since I am holding it for 10 years, I would have managed to even out the ups & downs of the stock market.
Please let me know if this is a wise thing to do.
November 1st, 2007 at 10:33 am
I think when you want to invest your money in pre-need companies, you should check the background, management teams,directors, owners.Look what happen to CAP PAcific (owned by Yuchengco’s group of company,Grepalife,RCBC,etc.,). Take the case of PAcific, from the audited F/S, you will know they have money, but they just don’t want to pay or earned little, what they did,is they spin-off the company.To make it appear,that they need a rehab plan for the planholders.At first, the SEC cancelled their license to sell w/ their Lifetime Plan,later, the SEC approved. ISn’t SEC supposed to be for the good of the public?So.the planholders who save their hard earned money during the early 80’s and 90’s now have to start all over again, and mind you, some of these planholders are either sickly,employed,lay-off,or worst,died can’t give their children education. It’s still boiled down to good corporate governance.(integrity,transparency,accountability,trust,and honesty are rare traits these days, coupled w/ poor government actions).