Pre-need failures

It is tough being in the working middle class. The rich have no money problems. The poor have no money to have problems with. The middle class earning a salary, trying to budget it to cover needs both current and future, have been victimized through the years by financial products that don’t quite live up to the promise.

I just got word that Loyola Life Plans is now undergoing liquidation by the Insurance Commission (IC). Loyola must be the last major memorial plan to go under. Then again, I was not surprised. The pre-need concept, which was once proudly touted as a Pinoy invention, is actually not sustainable.

ABS-CBN News reports (May 25,2023) that Loyola Plans was put under conservatorship by the IC in July 2019 due to a trust fund deficiency of nearly P150 million. It was placed under receivership in March this year and is now preparing for liquidation, wherein the government will sell its assets to compensate its plan holders.

IC assured that the real estate assets of Loyola Plans are enough to cover the claims of plan holders. There are 18 items up for sale, including a lot valued at P235.9 million. A stay order on all payments of claims has been in place since March pending the liquidation of Loyola Plans’ assets.

I experienced the failure of the pre-need plans in the early 2000s when my kids were in college, which was also about the time when my parents died. My first kid finished college on the plan, but the last two didn’t. Yet, the plans of the last two were more expensive than that of the first.

And when my parents died, the life plan they bought (I can’t remember the name) hardly covered anything. We actually paid for almost all of the funeral expenses out-of-pocket. Ironically, my parents bought those plans so that everything would be in place. Buti na lang we could afford to pay the out-of-pocket expenses that the college and memorial plans should have paid for.

A pre-need plan is not exactly insurance, which was why it was not initially regulated by the IC. After the College Assurance Plan (CAP) meltdown, a law was passed to put such plans under the IC, but that didn’t stop the fall of one plan company after another.

In a sense, a pre-need plan is a form of insurance. A funeral plan assures that you do not burden your loved ones with the details as you pre-arrange everything to take care of things when you die. Health plans help pay for medical treatments. Education plans pay the tuition of your children’s school. A pension plan is built up during one’s productive years so that one can draw periodic payments upon retirement from work.

On paper, pre-need plans sound attractive to the working middle class. It is a way of saving for a future need by postponing consumption today. You put your faith in the financial product to be able to provide for a future need.

But we have not had a good experience with the pre-need industry. One big failure was CAP, which left millions of Filipino pension and educational plan holders holding an empty bag. People’s hard-earned money were lost. I heard that CAP is now starting the slow process of repaying plan holders, but I have no idea how that is going.

In June 2020, there was a report from the IC that the pre-need industry suffered a net loss of P718.6M in 2019, as companies posted higher liabilities despite an increase in sales. Based on unaudited financial statements, the combined 2019 bottom line of 14 pre-need firms was a reversal of the P2.16B net income posted in 2018. Total liabilities grew 3.81 percent to P112.78 billion, and reserve liabilities rose 4.7 percent to P108.65 billion. Sales, however, increased 11.51 percent to P22 billion, 778,033 plans in 2018 vs. 923,370 plus in 2019.

That was pre-COVID. The situation now is most likely more horrible, which explains why Loyola Life Plans, a once blue-chip company in the pre-need industry has gone under.

Learning from the past, pre-need firms have encountered financial difficulties due to mismanagement, inadequate risk management practices, economic downturns, or regulatory frameworks that no longer apply due to drastic changes in the business environment. Factors such as unexpected increases in tuition fees and poor investment decisions caused pre-need firms to fail meeting obligations to plan holders. And strangely, they didn’t give inflation the respect it deserved.

Unless the concept is drastically refined, it looks like a Ponzi scheme where obligations are paid from premium payments of new plan holders.

The hardworking middle class salary earners are a good market for investment plans. I had written some months ago about insurance companies (including otherwise reputable foreign ones) offering pooled investment packages. But many investors are finding out that their insurance plan is worth less than the amount they have paid so far.

The sales agents of such plans tell us these equity and bond funds will allow us to grow our capital and invest for our long-term goals, whether it is for the children’s college education or for our eventual retirement. That’s generally a lie. The IC should regulate their marketing pitches.

For one thing, insurance plans are so dependent on our local stock market. We all know by now how disappointing our stock market has been. Investors make no money on insurance funds until they actually sell, and only if it happens that the market is on the rise at that time.

If an investor really wants to buy stocks, he is better off directly buying stocks of Meralco, PLDT, Globe, San Miguel, and Aboitiz Equity for stability and regular generous dividend payments. Otherwise, the only ones who make money are the insurance companies who charge a regular service fee whether the investor makes money or not.

So there… Our financial engineers, of which we have many good ones, must devise a product or a service that is safe for a middle-class padre de familia to invest in the hope that it will provide a safety net for future needs.

Something the FINEX guys can put their minds together on.

Boo Chanco’s email address is [email protected]. Followhim on X or Twitter @boochanco