Pinoy Fund Runners

Yup, you've heard it. Something bad happened on Prundential Life Plans, Inc. For those who have the luxury of time to read the whole story, you may find the article on the following link:

http://newsinfo.inquirer.net/142311/prudentialife-plans-told-to-stop-payment-of-claims

Before I provide a summary and opinion on this matter, you need to know the following facts about pre-need:

• Pre-need company is completely different from Life Insurance Company or Investment Company(i.e. Mutual Funds)
  
• There are 2 designs of pre-need education:
  • Open-ended – covers the educational tuition fee regardless of school or price of tuition fee. Risky to the company, but attractive to customers.
    
  • Close-ended – has a fixed interest rate (usually higher than the bank interest rate). Not attractive to customers but sustainable for the company.
    
• Open-ended coverage is the one used by CAP and Prudentialife Educational plans.
  
• Close-ended is the one used by big players such as Sun Life Plans.
  

For a brain-friendly summary:

• Prudentialife Plans, Inc. is a pre-need company established since 1978
• Known for offering Education and pension pre-need plans
• Security and Exchange Commission(SEC) stripped off the license of Prudentialife in selling new Pre-need plans in the year 2009 because the funds is running low within the acceptable limit by SEC.
• As of 2011, around 50,000 plan holders voluntarily terminated their policy on the fear that Prudentialife would lead to downfall similar to College Assurance Plan (CAP). That's around Php 3.8 Billion worth of lost revenue. This was the biggest BLOW to the company
  
• Recently, Insurance Commission has issued a STAY ORDER on Prudentialife. STAY ORDER means
  • Stop providing claims – to stop consuming the trust-fund
    
  • Prohibit liquidating properties – to ensure continuation of operation of Prudentialife on paying their obligations to the clients
    
  • Stop paying liabilities – To ensure clients are paid first before their liabilities
    
• Pending obligations of Prudential to clients: ~Php 10.5B*
• Total Assets of Prudential: ~Php 9.15B*
• Total Liabilities of Prudential: ~Php 19.67B*
• President of Prudentialife blames the recent 2008 recession and the unregulated increase of tuition fee during the Asian financial crisis (1997-1999).
  

*Philippine Daily Inquirer

Gov't, what the hell are you doing?

On my opinion, there are only two possible reasons why companies (i.e. CAP, Prudentialife, Pryce) failed to commit on their customer's expectations: Either fraud or bad decisions.

It is the job of IC(Insurance Commission) and SEC (Security Exchange Commission) to regulate and monitor companies to ensure the consumers are well protected. But during the Asian Financial crisis, these sectors have been lax in monitoring these pre-need businesses. Although new decrees have been place to regulate these businesses, they need to be more stringent and active in monitoring these companies. With the Prundetialife incident, a new decree is being proposed to increase the capital for pre-need up to 5 times.

Do not stop investing

As of now, it maybe a good idea to avoid open-ended pre-need plans while the government is trying to rehabilitate pre-need businesses.

I admit that my tuition fee at DLSU was covered by CAP. When I was 1 year old, my parents bought a pre-need plan from CAP. It was a traditional, open-ended, pre-need plan. The total amount paid by my parents is approx. Php 18K only, but it was able to cover almost 420K tuition fee in DLSU. I was part of the lucky ones who was able to get claims from CAP before they went down. But if I were part of the "unlucky ones", I would be extremely disappointed and I will no longer have the confidence to invest.

The confidence of Filipinos on Life Insurance Companies was affected due to the fact that majority of Filipinos has an impression that pre-need companies is one and the same with Life Insurance Companies. However, it is due to my complete understanding of their differences that still made me confident on investing on Life Insurance Companies. As a matter of fact, "Wala pang Life Insurance Company sa Pilipinas ang nalugi".

How about close-ended Pre-need plans, would you recommend it?

I would rather go for Mutual Funds. Close-ended pre-need plans provide an interest rate from 5-6% p.a. only. Although the returns are guaranteed, 5-6% p.a. interest rate is too low. If you are SUPER-UBER conservative (and an existing millionaire), go for close-ended pre-need. If not, I highly recommend go for Mutual Funds instead since it provides a faster growth of investment, at the same time liquid.