InvestmentsFinancial LiteracyInsurancePersonal Finance

Pre-Need Plans vs Life Insurance in the Philippines(2-min read)

Very few Filipinos invest in life insurance. Based on a historical figure, only 2% of Filipinos have some form of life insurance. A few days ago, I also talked about how life insurance is actually a need, more than a luxury. Part reason why Filipinos are averse with life insurance is the lack of financial education, such as what life insurance really is and how it is different from pre-need plans.

 
Knights by Brad_T, on Flickr
And as if on cue, Inquirer released yesterday a list of distressed pre-need companies, and a brief history on the industry here in the Philippines. Read Inquirer’s full article here.

Regardless of Cost

Usual pre-need plans rely on their capacity to meet future obligations, regardless of cost. Meaning they guarantee their clients an unknown future value. They promise to give you your memorial or retirement or education plan no matter how much that cost is. 
 
If you availed of a memorial or educational pre-need plan, you pay a certain amount then when the time comes that you need to claim, they are obliged to pay for your educational or memorial needs regardless of cost. The pre-need companies take the risk of rising costs (tuition, memorial services, inflation) and falling investment returns. They assume (and compute) that they have factored in this rise in cost and fall in returns in their trust funds and investments. Sadly not all succeed that is why many such companies fold. Further, claims may come in bulk and in batches, for example for maturing educational plans which may hamper a pre-need firm’s liquidity and stability if not managed properly.
 
A life insurance meanwhile, provides a fixed amount upon death. As such, the targeted amount that the insurance company is obligated to pay is already known, while the claims will not be in bulk since claims only occur upon death. It may be morbid but true: we all won’t die at the same time even if we all went to college during the same years. The investment portion in case of VUL is not guaranteed, and your agent should have explained this to you explicitly.
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Market Risk

Both pre-need and life insurance investments are subject to market risk since they need to invest their funds and premium payments to make it grow, and to service future claims. However, recall that a pre-need plan has already promised to pay your future cost not matter how much it is (open-ended, making it harder to fulfill) whereas  the investment portion of the VUL is not guaranteed, only the sum assured upon death is guaranteed.
 

Reinsurer

The article also mentioned that pre-need firms lacked the re-insuring structure, similar to the task of PDIC for banks. For insurance companies, there is the Philippine National Reinsurance Corporation (PhilNaRe). The Insurance Commission also recently scored a major approval to improve its policies, such as increased capital requirements for better stability of insurance companies.
Pru Life UK, a leading life insurance company and pioneer in VUL in the Philippines, is also backed a financial giant, its global parent company, Prudential Plc.



Photo: Knights  by  Brad_T 
This work is licensed under a Creative Commons Attribution 3.0 Unported License.

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6 thoughts on “Pre-Need Plans vs Life Insurance in the Philippines(2-min read)

  1. Hi Geri,

    Your blog opened my mind about the need of insurance. I’m nearing my twilight zone but I hope it isn’t too late yet to get one.

    I am actually thinking of a health insurance cum life insurance. I don’t know if such thing exists. But in any case, what kind of insurance, and which insurance provider do you think is/are recommended from your own point of view?

    Thank you for sharing your valuable thoughts to every juan…

    Best regards,

    Jerry

    1. Thanks for the kind words Sir Jerry. Usually, the top 5 providers are stable enough to handle billions of their committed insured amounts. And usually their offers are almost the same and comparable, they just vary on management fees etc. There are providers wherein you will get an amount in case of critical illness and an extra amount as well in case of death. But there are age limits to such coverage (example at age of 60 and up, the coverage for critical illness expires). I have friends from the insurance industry and if you wish to get a free quotation, please send me a private message.

  2. Financial literacy is a must, it should be added to the curriculum today to help the young to become financially wise and achieve financial freedom in the future.

  3. Great information. Thanks for providing us such a useful information. Keep up the good work and continue providing us more quality information from time to time. Life Insurance Policies

  4. Lots of citizens are finding the best out of best insurance plan for them. That's why they need a insurance planning courses. Today to be insured for your life through health insurance is very necessary for human being. This is one of the toughest tasks to get the benefits of health insurance for a senior citizen. Its an nice blog.

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