Another pre-need company collapsed this month (September 2013) and the company in question is Prudentialife Plans, Inc. (PPI). For more information, you may visit this link:
This is another blow to the Pre-Need Industry. It has not even recovered yet from the stigma brought about by another pre-need company, College Assurance Plan (CAP) several years ago when it failed to deliver its guaranteed payouts to policyholders at a time when they need the money to finance their children’s tuition fees. Naturally, a crisis of confidence ensued and doubts remain even to this day. Unfortunately, this kind of distrust over pre-need companies/products casts doubts on life insurance companies as well, something that the life insurance industry does not deserve in the first place.
Being in the Life Insurance industry, it is a common perception among friends and prospective clients to view both the Pre-Need companies with Life Insurance companies as one and the same banana.
So it is my hope that this piece will help clarify the difference between Pre-Need companies and products and Life Insurance companies and products:
1. In terms of regulating bodies that sanction Pre-Need companies and Life Insurance companies, they used to belong to separate governing entities. Pre-Need companies used to be regulated by the Securities and Exchange Commission (SEC) while Life Insurance, including Non-Life Insurance companies, are both under the wing of the Insurance Commission (IC).
This explains why many pre-need companies were financially distressed at a time when they were under SEC’s helm because capitalization requirements were not that strict. With the IC, you rarely hear a life insurance tread the same path as those distressed pre-need companies because life insurance companies operate under strict guidelines laid out by the IC.
So beginning January 2010, all three industries, Pre-Need, Life Insurance and Non-Life Insurance, were lumped under the same umbrella which is the Insurance Commission. This is to ensure that capitalization requirements are met and investment strategies are strictly followed to ensure liquidity and long-term sustainability of the business. Otherwise, companies who fail to do so will not be allowed by the IC to operate as a business.
To verify if a company is a Pre-Need company or a Life Insurance company, you just need to check the website of the Insurance Commission at this link:
2. Pre-Need products are usually Education plans, Memorial Plans and Pension plans. Note that products are known as plans and not termed as life insurance products.
Life Insurance products vary from the basic Term Insurance, to Whole Life Insurance, to Endowment products and most recently, Variable Life Insurance products or Unit-Linked products. While Life Insurance companies also have Education and Pension products, these are packaged to meet a specific financial requirement of the policyholder. The product proposal usually ends with life insurance or insurance, but NEVER plans.
To be sure, the easiest way to tell the difference is to determine if the company is Pre-Need or a Life Insurance company. So, when in doubt, go back to No. 1.
3. The purpose of Pre-Need products is to save a specified amount (with interest earned over time) for certain Life events like College funding (Education), Retirement plan (Pension) and Funeral expenses (Memorial). Hence, you prepare for a specific need in the future.
The purpose of Life Insurance products is to protect the policyholder from the uncertainties in life and different products cater to different financial priorities in life, namely: Education, Income Protection, Retirement or Medical needs. Therefore, you move to protect your financial priorities from life’s uncertainties which could be any of the following: permanent or total disability, critical illness or death.
It is general knowledge that Filipinos are averse to buying Life Insurance products. Hopefully, with the entry of variable life insurance in the product mix, the trend will be reversed as Filipinos are slowly becoming aware and educated in the area of financial planning, thanks largely in part to social media which helped in the rise of financial education awareness in the country. Variable Life, after all, offers living benefits as well as death benefits, something that term insurance products do not have. Living benefits are usually cash values that have grown over time and can be enjoyed by the policyholder while keeping the policy in force.
Coupled with the good economic direction our country is fortunate to have these days, Filipinos are slowly becoming savings and investment-conscious.
Ironically, here’s a typical scenario in the industry – when a Financial Advisor offers the product first (instead of probing the client’s financial requirements), the first reaction of prospective clients is to resist the product because Life Insurance is something associated with death. But you will be surprised that after rejecting the life insurance product, they will inquire from the same advisor if he/she is offering memorial plans instead (which is also associated with death because the benefits are intended to cover funeral expenses). If you will think about it, life insurance can give you both, living and death benefits while memorial plans can only give death benefits when the policyholder dies and may last only up to the interment date of the polcyholder.
Haste makes waste, as they say. The key to sound investing is due diligence.
Note: Ronnie Reyes is currently a Unit Head/Financial Advisor at AXA Philippines. Check his profile at http://www.linkedin.com/in/iamronniereyes.
Follow him at Twitter -@iamronniereyes.