Who’s afraid of pre-need plans?

cheque

There are many ways by which we can put into practice the principles of making money grow. We only hav to study carefully how a particular instrument works in relation to our goals, risk tolerance and time horizon.

One good instrument is the very popular pre-need plan. Pre-needs were in demand back then because of the promised delivery of future funds to the client for a low amount of investment. The client only has to invest a fixed amount of money for a certain number of years and wait for the promised maturity. In essence, a pre-need plan forces people to save for the future while giving them the benefit of a free insurance from risks.

However, pre-need plans made the news in more recent times on account of the failure of some pre-need companies to deliver on their promise. The problem arose from the open-ended educational plans that promised to pay tuition fees of beneficiary children when they reach college. Nonetheless, tgere were some companies that stuck with the fixed value plan where the beneficiary gets a certain amount of money for enrollment purposes. These companies survived and up to now are able to do their end of the contract.

Previously, pre-need companies were the jurisdiction of the Securities and Exchange Commission . Now, the industry is being supervised by the Insurance Commission. Under its watch, the industry has become more stable.

Unknown to many, pre-need products give a better return than bank deposits. However, the company needs to hold the money for a requisite amount of time the company to make it grow. Based on my calculation using Time Value of Money, pension and educational plans yield a minimum of 8 percent compounded annually, not bad when the banks were giving 3.2 percent net of tax for time deposit back then.

A good feature of these products is that these are transferable, meaning it can be sold to another person if the original owner does not want to wait for its maturity. This is where a friend of mine made good money out of it.

The original owner paid P 950 thousand over a period of ten years, the maturity being P1 million after ten years. Though the plan is not that attractive, this person bought it for the purpose of starting a savings program. One year into the maturity period, the owner suddenly, for some reason or other, decided that he wanted to sell his plan. Incredibly, the plan was sold to my friend in the amount of P780 thousand only! My friend was, of course, just too happy to oblige. He knew he had a good deal going. After a year, the plan matured and earned him P220 thousand for a whopping 28 per cent return for a year!

In a similar case, an owner sold his plan originally bought at P240 thousand for only P180 thousand. The plan will mature in just three years with an amount of P300 thousand. For the buyer, this is equivalent to earning 22 percent interest compounded annually.

There is money in buying pre-need plans, especially the old plans, because the return will be higher than that of a new plan. In deals like this, one man's gain is another man's loss. This is not bad since both parties agreed to the price of the deal.

Buying old pre-need plans can be a good source of passive income. Like the two examples above. The first one translates to a monthly income of P18 thousand and the second, P3,300.

However, in buying plans, whether new or old, the buyer should consider certain factors to avoid losing his hard-earned money. Here are some guidelines:

Funds availability. Make sure you have the funds ready for each payment terms. Remember that once you fail to pay, you run the risk of having your plan forfeited and losing all investments you made.

Goal for investing. Investment depends on the goal of the client. If the client's mindset is to discipline himself to save, then a pre-need plan is for him.

Time horizon. The product should match the client's horizon. If the client wants his money to be returned to him in a year, then time deposit is the solution. If the client is willing to keep his money for a longer period of time, then he is well advised to go for pre-need plans.

Risk tolerance. The longer money is invested, the higher the risk. After all, one never knows what will happen to an investment company in the future. That is why it pays to diversify our investment. Remember the adage: Never put all eggs in one basket? This makes sense. It pays to spread out money to different vehicles.

Company background check. To avoid losing your hard-earned money, invest only after checking the company for track record, stability, and trustworthiness. Also worth considering is their longevity, their trust fund and the people behind the company. The longer the company has been operating, the lesser the risk. It pays to make due diligence before handing over your hard-earned money to someone.

Mindset. This is the most important factor. When buying pre-need plans, make sure you will pay it up to maturity so that you may enjoy its full benefits. Otherwise, you will end up on the losing end just like the original buyers in the two examples above. Not only money was lost but also the time and effort spent in paying the plan over time.

Involve the spouse. For married people, it is wise to involve the spouse so that there will be check and balance. The spouse also needs to know every investment the other half makes so that in times of emergency, the investment will be beneficial to both.

From my experience, my late father had a stock investment in BPI (it was good the shares were few) that was in his name. It was after he passed away that we learned about this. If my mother was made the co-investor, then she could have been able to claim the stocks. In every financial decision, it pays to involve the spouse. When someone tries to sell me something, my best ploy to avoid the sale is to jokingly reply: “I have asthma.” That is my way of saying I have to ask my wife.

Happy investing!

Photo: “Check Writing” by David Goehring, c/o Flickr. Some Rights Reserved

Add this page to your favorite Social Bookmarking websites