Pre-Need Part II

Welcome back everyone.  Now, before we plunge into part 2, just a couple of additions to the stuff discussed yesterday.  First, the example we used yesterday featured one lump-sum payment at the start of the pre-need plan.  However, as someone pointed out to me, most people don’t do it that way.  Most people, when they purchase a pre-need plan, elect to make installment payments — from monthly, to quarterly to semi-annual to annual.  Now, the effect of such a set-up is that it actually makes things more difficult for the pre-need company since the later installments now have a shorter time frame within which they have to double.  For example, a lot of plans require the holder to pay for five years and wait for another five years before they receive the benefits.  Now, assume that the holder elects to make 5 annual payments, the second to fifth payments will have fewer years within which they can grow so the rate they will have to achieve will have to be higher.  Of course, a number of companies off-set or minimize this difficulty by either increasing the amounts the holder has to pay or by lowering the amount the holder will receive in the end.

Second, it was also pointed out to me that a number of plans also come with optional benefits — usually medical or travel insurance.  Now, if you don’t already have any of those in a separate policy, then it may make sense to sign up for them — especially if you travel a lot.  However, do not chose to get them just because they are advertised as being “free”.  Nothing is ever truly “free” and you can be sure that someone, somewhere is picking up the tab for your freebies.  (Even the “free” items you get for signing up will have to be paid for somehow and most probably it will be you as there is really no way for you to check that they didn’t use part of the money you paid them for “advertising expenses”.)

With all of that said, let’s continue our discussion…

Now, though the hubbub has died down a bit, the question still remains as to what people should do regarding their pre-need plans.  Well, depending on what specific circumstance you’re in, here are some things to consider…

First, if you are considering getting a pre-need plan, then here are some things to ask before you hand over any  money.  To begin with, ask for a copy of the company’s financial statements or annual report.  The key here is to get a sense of whether their trust funds are consistently growing over time.  Do not simply rely on leaflets and other marketing materials as the information there can be very,very different from what is recorded in their books.  Now, if the company is not publicly listed, they are well within their rights to refuse to provide you with any of the above.  However, it is my belief that if somebody expects me to fork over a substantial amount of my money for the next decade or so, then the least they can do is show me official documents as to how they have handled other people’s money in the past.

Next, ask for a breakdown regarding the company’s trust portfolio.  Ask to see where they will put the money you will invest.  Ideally, they should invest in non-related businesses and securities whose values can be independently verified.  A good example would be a fund that invests in corporate bonds, managed funds, stocks, government securities and other privately held firms (like Pilipinas Shell).  In all cases, the value of the different instruments can be tracked independently and it is easy to see whether their values are rising or falling over time.  A bad example would be a fund that invests predominantly in land and other non-revenue generating forms of real estate.  The reason I say this is because these types of investments are hard to value and difficult to liquidate.  Specifically, let’s say the fund buys pieces of land in a new development with the intention of selling it in the future.  The question then becomes whether the fund will be able to find a buyer at the price it wants at the time it wants.  Furthermore, what method will the company use to determine the value of said properties at any given point in time?  How will they know if they are ahead or behind?  After all, just because the owner of the property right next to theirs was able to sell at a certain price doesn’t automatically mean they can do the same.

Finally, if they are willing, try to find out just how much of the amount you pay them will actually be invested.  If they do provide you with a number, use the small table in part 1 to calculate the rate of return they will have to generate in order to deliver on their promise to you.  As a rule of thumb, if the required rate of return starts hitting the high teens and especially if it goes past 20 percent, then I would steer clear of that particular fund.

OK, now what if you are currently paying for plan?  Do you stop or continue?  Unfortunately, there is no one answer for every person but what I can provide are a series of questions to help you arrive at a decision.  First, how much have you paid?  This is the most immediate concern as stopping payments usually means foregoing all previous payments.  Follow this up by calculating how much more you have to pay.  Now, take stock and consider what would happen if you simply wrote-off all previous payments and basically started over with the amount you still have to pay.  What rate of return would you now have to achieve in order to reach your goal?  Of course, given the reduced amount and shorter time period, this will probably be higher than before, but it helps to know that figure.  That way, you get an idea of exactly where you are and how far you are from your goal.  Now, the best case scenario is that you continue paying and the company is able to pay you what you are owed.  Unfortunately, if you accept that possibility, then you also have to accept the scenario that the company will tank and you get nothing.  Ultimately, you will have to decide on whether you are willing to take the loss now and start anew or just keep paying and hope for the best.

The last scenario involves those people who have fully paid for their plans and are just waiting for the maturation period to pass so that they can get their benefits.  The first thing you should do is check if you have the option to cash in your plan earlier.  Some plans have offered this in the past though it meant you would receive a significantly smaller amount than originally agreed upon.  However, if you find that you can no longer even sleep due to the stress and uncertainty then maybe you should seriously consider cashing out now and gain some peace of mind.

In all three cases though, you should be willing to do your own legwork and gather all the information you can before you make a decision.  Go on-line, read news archives, ask whoever you can but make sure to get as much hard data as you can — don’t simply rely on rumors and hearsay.  Get hard evidence then make a choice.  Keep in mind that this is you’re money we’re talking about and no one will ever really value the work you put into earning it as you.  Take charge of your money so you can make better decisions now and in the future.