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Pre-Need Plans vs Life Insurance in the Philippines

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).

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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.
 
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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About Geri (351 Articles)
Founder and main author. Husband, used-to-be-breadwinner, God-made multi-millionaire, employee, financial planner and adviser, investor, stocks trader, entrepreneur, agri-preneur, book author. Firm believer that all Pinoys deserve a richer life. Not a guru, but a forever student of the investments world, a work-in-progress.

4 Comments on Pre-Need Plans vs Life Insurance in the Philippines

  1. Agreed. Instead of attending seminars after college, this should be inculcated in our students as early as grade school or high school.

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  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.

    Like

  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

    Like

  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.

    Like

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