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.
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.
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.
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.
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.