HMO, mutual fund and world economic recovery by Christmas?

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets. — Peter Lynch

I’m not panicking, and I’m not scared, I’ve been through the Gulf War, the Asia crisis, and the Russian crisis. — Prince Alwaleed Bin Talal Alsaud

Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing: those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.  — Noel Whittaker

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1. — Warren Buffett

One of the age-old hurdles to Philippine progress is the pernicious “get rich quick” mentality, which we should exorcise from the national soul, and nowhere is this best exemplified than in the murky and cynical world of politics.

There are no real shortcuts to success. Not all should become entrepreneurs, but I strongly believe that all people should be encouraged to save money for the long-term, either through real estate, life insurance, blue-chip stocks and others.

Experts predict economic slowdown and a real estate slump for the Philippines this year, and I agree, but I also still believe mild world economic recovery will possibly start by Christmas. Global recession or not, real estate slump or not, we who are professionals, students, housewives, entrepreneurs and others should continue nonstop hard work, savings, investing, insuring and innovating.

Oops! Apologies for my typographical errors — GMA Artists Center publicity director Shirley M. Pizarro is only 42, not 49 years old, and the correct name of Marilou So’s trucking business is Cathedral Cargo Movers.

To promote a national culture of savings instead of a society of consumers, we continue the special partnership of The Philippine STAR and the country’s largest homegrown life insurance giant, Insular Life, with this question-and-answer forum on savings, investing and personal finance issues. Here are some readers’ questions:

Question 1: What are HMOs? Is there life insurance with health benefits?

Congratulations on your enlightening Q&A series on money issues. I am Dr. Marissa M. Buenaventura, 44, a dentist here in Legazpi Village, Makati. Can you enlighten us about health maintenance organizations or HMOs? Can HMOs be part of a life insurance policy, or added on to it? As a dentist, my question is whether HMOs are satisfying the needs of the public. It is my impression that many dentists or doctors tied up with HMOs do not give excellent or optimum service to patients, because HMOs reportedly pay them only small amounts. Is this true? If true, can the HMO companies be encouraged to increase their payments to dentists and doctors?  

ANSWER

HMOs are arrangers of healthcare services that provide in-patient, outpatient, and emergency benefits to its members. For a fixed annual membership fee, a healthcare agreement issued to the member entitles him to a set of specific healthcare benefits for one year, subject to limitations such as pre-selected room accommodation, maximum benefit limit per illness per year, among others. HMO agreements are renewed yearly, and membership fees may change upon renewal.

HMOs contract the services of health care providers such as clinics, hospitals and doctors. Professional fees paid to providers are mutually agreed upon by the Association of Health Maintenance Organization of the Philippines (AHMOPI) and the providers’ specialty society or organization/corporation. Such fees are reviewed regularly. For dental services, the agreement is between the HMO and the organization of dentists.   Providers are expected to render excellent or optimum care to members/patients.

More and more companies are securing the services of HMOs in providing for the healthcare coverage of their employees. As a result, employees who normally cannot afford to consult with a specialist or be confined in a tertiary hospital can now avail themselves of these services and facilities.

At Insular Life, clients can have a health insurance rider attached to some life insurance policies. Unlike HMO products that pay the medical service providers directly, these health riders provide cash allowances to policyholders for each day of hospitalization, thus allowing the policyholder/insured to use the money as he sees fit. Insular Life also has group health insurance plans that provide medical reimbursement benefits to employer-employee groups. Since these products are generally not paid directly to the medical providers, they would probably suit those who do not want to limit their medical provider choices to those accredited by the HMO company.

Insular Life has an HMO subsidiary, Insular Life Health Care (I-Care). If you need further information on I-Care please contact Karla Fernandez at 813-7855 or kfernandez@icare.com.ph.

Mayo Jose B. Ongsingco

President & COO, Insular Life

President, Insular Life Healthcare, Inc.

Question 2: How are variable life policies as investment options?

I am Herbert D. Tuason of Greenhills, San Juan. My wife, Bambi, and I always read your amazingly diverse columns on Sundays and Mondays in The Philippine STAR. I am a banker by day (a vice president of BPI Family Savings Bank) and a tailor by night, helping my wife during weekends with our new Made 2 Measure tailoring shop (part of the Exclusively His chain) in SM Hypermart Pasig. I am 48 and have two young kids aged five and six. My questions are: The returns on variable life before were very high and thus selling like hotcakes. How is it doing now with the global economic crisis? Do you recommend that people buy that over other investment instruments like mutual funds? Why or why not? Any other life insurance plus investment advice?

ANSWER

Variable life insurance is an investment-linked product and as such is not immune from the volatility brought about by the global financial crisis. Though there was a dearth in new business as risk aversion surfaced in the midst of the prevailing crisis, panic among Variable life policyholders was subdued. Making policyholders aware of the risks in investing in variable life insurance products through proper selling has helped in preventing what would have been another “UITF crisis scenario.” As long as investors realize the value in long-term investing and keep their investments intact, paper losses will eventually reverse when market conditions improve. The global crisis was actually perceived by some of our policyholders as an opportunity to top up their existing investments. True enough, equities, for instance, have already gained almost 31 percent a year to date. Slowly, we are seeing confidence return to the market though the majority of investors are still on the sidelines waiting for clear signs of lasting recovery.

As there are a lot of investment outlets to choose from on the market, it would be wise to do a background check on the company offering the product. Entrust your future only to institutions with a track record of expertise and dependability. Insular Life has been in the business of managing funds for almost 100 years now with an utmost commitment of providing financial security to our policyholders. For specific life insurance and investment advice, you may get in touch with our financial consultants.

Ruth R. Velasco

Senior Manager

Investment Management Staff

Question 3: What are variable life policies and mutual funds?

(Author’s note: This is my own follow-up question.) Kindly clarify for us non-finance folks the exact definitions of variable life and mutual funds in laymen’s language.

ANSWER

Let us first look at the similarities between the products.

Both variable life and mutual funds are pooled investments: individuals contribute varying amounts to a fund, which are then used by a fund manager to buy or invest in various types of assets such as stocks, bonds, deposit instruments, and loans to prime corporations. The fund manager trades (buys and sells) these investments, making gains and income (or losses), in the process.

As these investments actually have varying risk characteristics, the funds are in fact grouped and classified according to type of investment instrument carried and its accompanying risk: an equity fund invests in listed shares of stocks, a bond fund invests in government securities (treasury bills, treasury notes) and a balanced fund invests in a mix of securities. There are other types of investment funds, but these are the most basic ones available in the market. Investment risk or the risk of not earning anything or not earning enough — or even losing the principal invested — is shouldered by the investor. While investment risk cannot be eliminated, it can be managed. This is done is through diversification (as the saying goes, by not putting all your eggs in one basket).

Pooled funds also are convenient and cost-effective ways of doing investments, as even with limited savings, one can avail himself of the services of a professional investment manager.

Next, let’s look at the differences. The Securities and Exchange Commission supervises mutual funds while the Insurance Commission oversees variable life. When you invest in a mutual fund, you really buy shares in the mutual fund company. When you invest in variable life, you buy an insurance policy. Anyone can invest in a mutual fund; on the other hand, there must be a person to be insured or covered with life insurance for variable life to take effect.

The cash value or the amount one can get if he turns in his variable policy, and the claim proceeds in case of death, depend on the value of the underlying investments. Thus, variable life is also called investment-linked insurance. However, even if the investment funds lose considerable value, there is always a minimum death benefit that is guaranteed and fixed by regulations.

Variable policies’ major advantage is that they allow you to accumulate investment profits to your beneficiaries, tax-free, on certain conditions. It also enables you to participate in various types of investment options without being taxed on your earnings (until you surrender the policy). You can also apply the gains or interest you earn on these investments against the premiums, potentially lowering the amount you pay.

While both investment products can provide different and effective approaches to your financial goals, variable life is the only product that can give you insurance protection and the element of a tax-advantaged long-term investment.

In choosing an investment product, you need to be clear about your financial goals: is it for your family to continue enjoying their current standard of living, continued education for your children even if the breadwinner passes away, taking care of estate taxes, having a comfortable retirement, or other similar goals? We are glad to note that variable life is such a flexible investment that it can adjust to life’s changing needs.

Wilfredo M. Llanto

Senior Vice President & Head

Finance & Investments Group

Question 4: How do we know which insurance firms are more reliable and stable?

I am Anthony Frank L. Tan, owner of Xtreme Foods Merchandising and Tortilleria El Mexicano Inc., and a life insurance agent of 13 years. I started out with Sunlife and am now with AXA. I would like to know which of the two companies are more stable and reliable. 

ANSWER

We regret that we are not in a position to answer this question. It would not be professional or ethical if Insular Life were to comment on the stability and reliability of other insurance companies. Instead, may we direct you to a more authoritative party like the Insurance Commission? As the regulator of the insurance industry it knows and assesses all the financial information and business performance results of every company. The IC would therefore be in the best position to provide data for you to study and draw your own opinions or conclusions from.

Jesus Alfonso G. Hofileña

Executive Vice President & Head

Sales & Marketing Group

Question 5: How about variable life products; is it better to go with single or dual pricing?

Units of variable life products are priced using either the single or the dual pricing method. Under the former, only one price is used either to buy or to sell units; under the latter, there are two sets of prices: one for investing or buying into the fund (called the offer price) and another one for divesting or exiting from the fund (called the bid price). The offer price is always higher than the bid price, usually by five percent. This difference between the offer and the bid is the “bid-offer spread,” and is effectively a fee charged by the insurance company to defray trading and administrative costs associated with running the fund. In the case of single pricing, there is a similar one-time charge but this is made at the beginning of your investment, and likewise takes care of administrative costs.

Both pricing methods are acceptable. Single pricing, however, has better appeal to the investor as it is easier to understand. Furthermore, as the bid-offer spread is, in effect, a deferred or delayed charge, this implies that the insurance company also gets a share in your investment’s upside, unlike under single pricing.

Vera Victoria Morales

Assistant Vice President & Deputy Head

Investment Management Staff

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For more inquiries, or if you want to schedule a Wealth Management Forum for your group, call Insular Life’s Brand Marketing Department at 582-1818 loc. 1850 and 5124 or e-mail brand@.insular.com.ph or visit website: www.insularlife.com.ph.

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Questions and comments welcome at willsoonflourish@gmail.com or my Facebook account. Thanks for all your letters!